The Logic Behind The 35 Year Bull Market In Global Stock Markets

Since the middle of October, the global stock market has been strengthening again. If the bull market with a longer period of time has lasted for 6 years, if the cycle is longer, it will be in the ascendant trend since 80s of last century.

If the short-term stock market's rise and fall may be driven by events, what are the factors that can drive the bull market in the long run?

Many people think that the increase in social wealth has pushed the stock market up, but according to the French economist Thomas Piketty, the wealth / income ratio (wealth/income ratio) is relatively stable in the long term.

In fact, in recent decades, there are two main factors driving the rise of the stock market: first, the long-term decline in global real interest rates; two, the proportion of corporate profits in national income continues to rise.

The above two factors stimulate the future earnings expectations of enterprises to continue to rise. According to the dividend discount model, the discount rate of the denominator decreases with the decrease of real interest rates while the molecules become larger.

In addition, the low inflation environment also brought a low inflation risk premium, which boosted the stock market and bond market growth.

The above reasons are relatively well understood. Morgan Stanley economic adviser, former member of the Bank of England Charles Goodhart and Bank of England economist Philipp Erfurth pointed out the link between the above reasons in a recent paper.

They believe that there are direct links between the two reasons.

They believe it is increasingly difficult for workers to ensure that their real wage growth is in line with the speed of labor productivity growth.

Until this trend reverses, it is expected that risk asset prices will go out of the long-term upward trend.

Obviously, if workers' real wages increase slowly and production efficiency increases, the proportion of corporate profits in GDP will rise, which is a good thing for the stock price of enterprises.

At the same time, it will also lead to a decline in real interest rates.

There may be three reasons for the decline of wage income in GDP. First, with the deepening of globalization, workers with low skill levels are pouring into the employment market. Two, with the progress of science and technology, many low wage jobs have been replaced; three, trade unions have been suppressed by law or other factors.

According to Goodhart and Erfurth's papers, lower real wages have increased inequality in Western economies, and the redistribution of real income and wealth from the poor to the rich has brought about a decrease in aggregate demand.

Because the poor have a higher marginal consumption tendency relative to the rich, the above wealth redistribution reduces consumer demand.

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There will be ways to cope with falling demand: fiscal expansion (tax cuts, increased subsidies for the poor) or interest rates cut through the central bank.

Such a strategy will lead to an increase in the fiscal deficit and an increase in the ratio of public debt to /GDP, and the burden of more and more policy adjustments will eventually fall on the monetary policy institutions.

Such a cycle will lead to a rise in the price of risky assets, and social inequality will continue to increase after the next cycle.

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It will also lead to higher debt ratio in the private sector.

Because falling real interest rates stimulate the willingness to borrow. When asset prices rise, especially in the real estate market, both credit value and borrowing capacity increase.

Then the continued rise in debt rate will eventually lead to market collapse, which is what we saw in 2008.

The collapse of the market led to a more substantial and sustained drop in real interest rates, and we entered a new cycle.

We need to pay attention to the basic driving forces in the process of increasing wealth, such as the share of workers' income in national income. If this proportion starts to rise, consumer demand will grow at a higher rate, and real interest rates will also have room to increase in order to curb the debt ratio of the private sector.

But in many ways, this is a healthy phenomenon, but for the stock market, the consequent decline in earnings expectations and the rising discount rate have struck a double blow.

The three reasons for the real wage decline in the developed economies mentioned before are no sign of substantial improvement.

In particular, last week's mid-term elections in the United States went all the way to the other extreme.

It can be seen that the bull market that has lasted for 35 years will not be terminated for the time being.