Decoding Super Cycles with Peter Oppenheimer: Insights From ‘Any Happy Returns’

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• The dynamic interplay between market cycles and structural changes in the global economy impacts everything from investor psychology to corporate profits and overall economic growth.
• Peter Oppenheimer, the Chief Global Equity Strategist and Head of Macro Research Europe at Goldman Sachs, says that these cycles and changes (which often include moves by governments and central banks) also impact investment strategies, valuations and future returns.
• What changes are affecting the economic climate right now, and what kind of cycle are we in? Peter shares insights on his new book “Any Happy Returns: Structural Changes and Super Cycles in Markets,” and his take on today’s geopolitical landscape.

Picture it: Before a long period of falling, interest rates and inflation peak. Economic policies such as deregulation and privatization rule while globalization grows stronger.

But as we all know, the only thing anyone can count on is the breakneck pace of change.

So while those market dynamics might sound contemporary, they’re actually  economist Peter Oppenheimer’s recollection of the early 1980s, when his career began.

“It was a time of great change, both cyclically and structurally,” says Peter, who serves as the Chief Global Equity Strategist and Head of Macro Research Europe at Goldman Sachs.

Cyclically, that era was marked by the beginnings of the “great disinflation” that followed the very high inflation of the 1970s. Structurally, the ’80s were a time of “great changes in deregulation of financial services” as well as supply side reforms that “brought in a whole new way of thinking about economic policy and the prospects for growth,” Peter adds.

Three years ago, Peter’s first book, “The Long Good Buy,” explored how market cycles interact with economic cycles — specifically shorter-term cycles that tend to coincide with economic expansions and contractions. His new book “Any Happy Returns: Structural Changes and Super Cycles in Markets” complements that first book with a focus on long-term structural changes.

Kevin Coldiron welcomed Peter to new Ideas Lab episode of Top Traders Unplugged for a fascinating dialogue about the relationship between market cycles and structural changes in the global economy; the potential impact of AI on productivity and profitability; and a discussion about the crucial roles of central banks in promoting decarbonization and maintaining economic stability. Read on for highlights of Peter’s four-phase framework for understanding equity cycles and his thoughts on which cycle we’re in right now.

Phasers on equity

Financial markets respond to and anticipate economic turning points. There have been about 35 recessions in the U.S. economy since the 1850s, and roughly the same number of bearish years in the equities market. About 13 of those recessions and bear markets took place since World War II. Peter’s work explores the connectivity between expansions and contractions in the economy overall — and the specific dynamics of equity markets, bond credit markets and other financial instruments.

“[How] the structural changes within which these cycles unfold can be much more long-lasting, and a really a function of so many other factors — geopolitics, how fashions in society change, how priorities shift, and the impacts of technology, demographics and all of these other kinds of things … shap[ing] financial markets as well.”

Peter breaks equity cycles and their drivers down into four phases: despair, hope, growth and optimism, distinguishing each by varying forward-looking return requirements. It’s about what investors want at different phases in the cycle — the psychology of how they interpret the fundamentals.

Bearish despair

“What we call the ‘despair phase’ is in effect a bear market,” Peter says. “It’s a period where risk assets like equities are falling in price. That’s usually because investors are anticipating a fall in profits, which is normally a function of recession — to incentivize investors to take risks when conditions are deteriorating. They require a much higher return. That’s really why the risk premium in that period tends to be very high.”

Although it seems counterintuitive, the data makes this reality abundantly clear.

“Of course, I should say that cycles do repeat themselves through[out] history under very different circumstances,” Peter adds. “They’re not all the same in terms of lengths or depths, but they do tend to have repeated patterns within them. Often the best times for investment, for example, are when uncertainty is very high and when economic data is very weak — when companies are posting poor earnings. That’s the time when investors start to see prices rising in anticipation of a future recovery.”

That’s exactly why the second phase, the recovering price, is what he calls the “hope phase.”

“It’s about hopes of recovery rather than actual proof of that recovery,” Peter explains. “That’s a phase when valuations tend to rise very quickly and dominate the returns. It’s not until the [third] part of the cycle, what we call the growth phase, when companies are posting profits and paying dividends and economies are growing, that most of the actual growth comes through.”

But investors have already paid for some of that in anticipation, so returns and valuations tend to be positive yet moderate, leading to yet another phase.

Peter describes this fourth phase, optimism, this way: “The more valuation improves, the more investors are attracted back [to] the market. Earnings growth fades but returns are strong … enough to [function] almost kind of like a self-reinforcing thing to bring more people into the market.”

Inflation, valuation and optimism

Kevin asks Peter what phase he thinks we’re in right now.

“I have to confess — as with most things, when it comes down to data, it’s so much easier to see these things with the benefit of hindsight than in real time … [when] you can misinterpret these signals very easily,” Peter replies.

“If I had to guess I would say we probably are entering an optimism phase of an extended cycle. I think you could place the despair phase in the pandemic of 2020.” That was due to a fall in stock prices along with widespread fears of a deep recession and profits declining.

“As you got the introduction of vaccines, and furlough schemes and other interventions from governments, things didn’t seem to be quite as bad as feared,” he recalls. “We got the first hope phase of very explosive recovery from those bear market lows. We’ve been in a period of expansion of economic activity over the last few years.”

Sure, we’ve seen inflation pressures pick up — “but that’s not that unusual with rising rates,” Peter adds.

However, now we’re seeing risk assets rise again (both in price and in valuation) as investors are getting more confident in a “soft landing.”

“I think this optimism phase could last a while,” he says. “I certainly don’t think we’re in a bubble. But I think we’re probably in the later stages of one of these cycles.”

A steady, chill optimism

Peter notes that an optimism phase, in which valuations are high, doesn’t necessarily mean we’re about to see a collapse in the markets. We could see an extended period of rising returns, “but at a lower pace for still some time,” he says. That’s why — given today’s sky-high valuations, particularly in the U.S. equity market — he has a “reasonably good sense that forward-aggregate returns are going to be lower.”

But we could stay in a “fairly benign environment for some time, where absolute returns are rising, but not at a very high pace.”

So Peter thinks that diversification and “focusing a little bit more on alpha, rather than beta” and identifying differences “across the markets, rather than just buying the market” is the way to go.

In other words, let’s remain proactive and discerning, making strategic choices instead of passive market moves.

Spoken like a true Top Trader.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.