ebook essays pieces of the puzzle
Tuesday, April 12th, 2011
thirty years

Three decades ago we had high inflation and high interest rates.  The subsequent disinflation took interest rates down and multiples up, leading to a ferocious bull market in stocks and bonds.

Within the stock market, there were significant differences in the performance of sectors.  Financial companies flourished and, of course, the boom in personal computing created giant companies out of tiny ones.  Another phenomenon was the underperformance of cyclical stocks.  That’s illustrated above with the ratio of two Morgan Stanley indexes, one representing thirty “economically-sensitive” stocks and the other a like number described as “consumer-oriented, stable growth.”  Each index is made up of recognizable blue chips, but one swamped the other.

However, except for the period of the financial crisis (which causes unusual kinks in almost every long-term chart you create), it has been a good long while since consumer stocks have outperformed on a consistent basis.  Observing investor sentiment today, the excitement is aimed stock after stock in the cyclical index.  It seems a little frothy, but a long-term chart like this shows that trends can last longer and go farther than you might expect.  (Chart:  Bloomberg terminal.)