New business cycles and bull markets can be great opportunities for investors to enhance wealth and fulfill wealth planning goals. However, it is essential for investors to embrace these periods in their early stages, identify the key elements that are driving the upward trends, and vigilantly look out for risks that could derail the cycle. As you know, our team firmly believes that in late 2023 we entered a powerful new business cycle that welcomed the bull market in global equities that we have been enjoying thus far. Every business cycle and bull market is different in complexion, strength, and risk. In our view, this one may be stronger than the “average” in terms of both time and strength. While this might be very constructive for investment returns, it may also pose greater risks along its journey over the coming years. Let’s break down what’s driving this new business cycle and bull market and identify some of the risks to its longevity...
The Birth of New Business Cycles and Bull Markets
In our Founder’s first book, TheJourney to Wealth, there is significant discussion regarding business and market cycles. One of the hallmarks of “kick starting” these cycles is when global economies transition from a period of economic/market disequilibrium –such as an economic recession or a period of hyperinflation – to a period of resolution and equilibrium. Extinguishing recessions or inflation can be grueling for stock markets and economies as we saw most recently in 2022, when markets declined approximately 30% and tech stocks fell in excess of 40%.However, resolution of these economic disequilibriums serves as an economic “reboot” in terms of corporate profit outlooks and investment, as well as consumer confidence and spending. This revival of economic “animal spirits” can be powerful for equity markets, which is why the average business cycle and bull market ranges from 7 to 9 years – worth the wait indeed!
Anatomy of this New Business Cycle and Bull Market
Each new business cycle and bull market has similarities and differences. Here are some of the more important components of a new bull market:
- Stock prices undervalued relative to future earnings
- Economic growth reaccelerates
- Corporate profits “beat” investor expectations
- High levels of investor cash – that normally should be in stocks
- Central bank policy transitions to lowering interest rates
- Technological breakthrough – not common in all business cycles
For those investors who doubt the viability or durability of this new bull market, a review of this anatomy should be revealing and a confidence booster . Stocks– outside of tech related artificial intelligence (AI) – are historically reasonable. Economic and corporate profits continue to surprise to the upside and there is more than $5 trillion in money markets funds that normally would be in equities! Those cash levels are what we call “FOMO fuel,” which will likely continue to power stocks higher – with corrections along the way. Lastly and importantly, our Federal Reserve and other global central banks are just starting to transition to a policy of lowering interest rates – a great additional booster for our new bull market “rocket.” Lower interest rates stimulate economic growth and corporate profits and put the“wind at the back” of global equities. Not all new business cycles come with the tailwind of technological breakthroughs, but this one sure does in the power of artificial intelligence (AI). Put simply, AI has the power to make our global economy more productive – doing more with the same or less infrastructure – which typically leads to higher-than-normal corporate profits.The industrial revolution and the leverage of the internet brought similar higher-than -normal growth, or what we refer to as “super-cycles.”
Sectors and Stock Selection – Here Comes the Rest of theMarket!
This bull market has already exhibited that investors should be discerning about which sectors of the economy in which to invest, as well as which specific companies to target for investment. We believe the companies that manufacture the elements that drive AI – such as semiconductors – have been and will continue to be attractive investments (many of which you own). However, as investors we need to look forward in time to which sectors and companies will also be the beneficiary of this new AI tech-led business cycle. In our view this would include many sectors and stocks that have yet to participate in this bull market – namely financials, industrials, telecommunications, healthcare, materials, and energy. It would not surprise us to see these somewhat muted sectors come roaring back once the Fed starts their rate cutting in earnest – which we believe will be in September. We are positioning your portfolio to harness the power of this important change.
Important Risks – The Known and the Unknown
Though business cycles tend to last many years they can get derailed or stall due to any number of factors that negatively affect the global economy. These types of events can cause stocks to perform poorly and suffer significant loss. In terms of today’s known risks, we would include Federal Reserve policy, inflation trends, harsh AI government regulation, increasing geopolitical tensions, and US government debt. Domestic politics, such as the upcoming US election, seldom play a role in deterring business cycles and bull markets, but can negatively affect certain sectors of the market. We will be keeping a close eye on these known risk factors. As we like to say “there are various unknowable risks” that we need to be prepared for, which is why we consistently employ our Active Risk Management process, which includes your portfolio’s percentage allocation to stocks, your sector exposure, and the use of carefully placed stop loss orders. These mechanisms have been successful in preventing dramatic losses – which is essential to long-term wealth accumulation.
Fixed Income – Time to Shine
In our view your bond positioning should add value to your overall portfolio performance, while reducing the risk and volatility of the stock market. When interest rates were peaking, we were able to “lock in” some very attractive yields over the longer term. Additionally, as central banks lower rates, we will also benefit from a general rise in your bond prices and valuations. It should be a constructive future for your fixed income holdings.
We hope you find this update helpful – if you have any questions about your portfolio or have experienced a significant change in your finances, please let us know.
If you have a family member, friend, or colleague who might benefit from this update, please feel free to forward it to them or let them know how to contact our team.
Thank you again for your continued vote of confidence.
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Disclosures: https://bit.ly/3TCc78H