In their book The Fourth Turning authors William Strauss and Neil Howe build on the theory that history is cyclical, repeating after four ‘turns’ lasting 20-25 years each. They call these four stages a high (a period of relief after a crisis), an awakening (getting back to reality after a high), an unravelling (folks turn unhappy and pessimistic), and finally a crisis (a major sea change that hits humanity’s reset button).
I have a similar theory, though the cycle that I outline below has only three elements. This cycle helps predict societal, economic and market behaviour from a high-level, long-term perspective.
My observation as a student of both history and the markets is that the macro picture is shaped by revolution, innovation and complacency. These elements are fluid and aspects of each are always present in any given timeframe, but the characteristics of one usually dominate a period.
Cycles of revolution, innovation and complacency
Cycles of revolution, innovation and complacency are broad enough to be considered global. However, for the sake of brevity, I will focus on the United States as I set out to establish which cycle dominates the present. Awareness of these cycles and their inevitability can bring a sense of relief, helping us to understand our current economic circumstances and where we might be heading.
These cycles repeat throughout history. With the arrival of the internet and social media, and today’s breakneck pace of innovation, the speed of these cycles has accelerated.
From the 1950s to the present
The 1950s was a period of innovation. The US economy grew by 37% and the median American family saw its purchasing power increase by 30%. The baby boom drove a nearly 20% rise in the population. A massive housebuilding programme drove a home ownership boom.
Then, in the 1960s, innovation gave way to complacency. Huge government spending and the Vietnam War drained the optimism of the 1950s. Growth slowed, inflation spiked, and the dollar weakened. However, there were some positives as well, as technological innovation spurred the computer revolution, poverty declined, and trade became more global.
In the 1970s, revolution overtook complacency as the dominant theme. Innovation continued on many fronts, including civil and women’s rights, but the decade was dominated by political upheaval, anti-war demonstrations, anti-government sentiment, soaring inflation and the erosion of US prestige. These factors contributed to a recession and a rise in poverty.
Fast forward and, despite the Cold War and first Gulf War, the economy rebounded in the 1980s and 1990s. Then came a great period of technological innovation, followed by the complacency of the dot.com bubble. As Americans strived for the American dream, splurging on big screen TVs, SUVs, smartphones and more, the nation’s budget deficit increased, fuelled by excessive levels of consumer credit and an addiction to cheap imports.
From this viewpoint, the US really did not see much in the way of a revolutionary attitude until the post-9/11 period. I believe the shift from accepting the status quo to questioning it began with the Tea Party in 2009, which brought about the populist revolution in the Republican party that gave us President Trump. One could argue that, over the last decade, all three cycles have impacted society, the economy, and the market. However, the dominant cycle at this point appears to be revolution, as it was in the 1970s.
Where does this leave us?
Given the similarities between our current circumstances to the environment of the 1970s, we should anticipate that revolution will continue to be the dominant theme, spurred on by high inflation, war in Europe, further erosion of US prestige on the global stage post-Trump, an economic slowdown, and social upheaval.
Nevertheless, whichever cycle is in the ascendancy, there are always opportunities to capitalise on market movements, and change is the only constant. The current phase will pass, leading to a new and improved period of innovation.
Mish’s ETF support and resistance levels
S&P 500 (SPY) 380-383 viable support
Russell 2000 (IWM) Needs to clear the 200-WMA at 176.47 to see more rally, support at 170
Dow (DIA) 50-DMA above 325.25, support at 309-310
Nasdaq (QQQ) 50-DMA at 305.40, support at 282.50, 290 now pivotal
Regional Banks (KRE) 56 the 200-WMA, 60 resistance
Semiconductors (SMH) Support at 209-210
Transportation (IYT) 211.90 support, with resistance at the 50-DMA 231.70
Biotechnology (IBB) Above the 50-DMA with resistance on weekly chart at 121.15, support at the 50-DMA 116
Retail (XRT) We are back looking at the 200-WMA or 60.75 major support