Sideways Moving Markets
How can one navigate a changing investment landscape with the same old investment strategy?
After nearly 40 years of a bull market in bonds—culminating in a period where over a third of global government bonds had negative yields—it might seem implausible to imagine an extended era of market stagnation.
Yet, history tells us that such periods often follow times of exuberance.
Market euphoria, whether fueled by borrowing from future returns or by a volatile mix of innovation and speculation, tends to end poorly.
The fallout can take the form of an abrupt crash or, more commonly, prolonged sideways market movements. These stagnations are marked by sucker rallies, heightened volatility, and the obsolescence of previously successful investment strategies. Over time, these factors combine to produce an environment of frustrating stagnation.
In the past century, there have been three notable eras of prolonged market stagnation:
The United States (1929–1951): A time of remarkable innovation, rising geopolitical tensions, and rampant speculation. This period also saw rapid credit expansion, epitomized by the proliferation of margin lending.
The United States (1963–1981): Characterized by structural inflation, a loosening of post-war capital controls, increased regulation, and rising interest rates.
Japan (1989–2023): Defined by the bursting of an extraordinary property bubble, Japan’s stagnation played out in the world’s largest exporter of capital, with up to 40% of global savings concentrated in a nation experiencing demographic decline.
Each era carried its unique traits but shared common threads: false dawns, extreme volatility, and shifts in sentiment that punished both bulls and bears. Investment strategies suited to bull markets proved ineffective, and those clinging to them often faced significant losses.
Looking to the present, China now faces the early stages of a property bubble collapse, compounded by a rapidly aging population and an economy four times the size of Japan’s at the start of its stagnation. China’s policymakers would do well to study Japan’s experience, as China’s demographic and economic challenges are accelerating even faster than Japan’s did.
Periods of long-term market stagnation offer far more opportunities to lose wealth than to build it. False dawns, shifting investor sentiment, and economic volatility can lead to generational shifts in wealth, where those who fail to adapt lose out to more flexible strategies.
The objective of this report is to take a deeper dive into the three historical periods of market stagnation mentioned above. By closely examining the unique dynamics and underlying causes of each era, we aim to uncover key lessons that can inform modern investment strategies.
Understanding the patterns, pitfalls, and adaptive approaches that emerged during these prolonged stagnations can provide invaluable insights for navigating today’s uncertain and evolving financial landscape.
The key to preserving wealth in such environments is understanding the causes and symptoms of prolonged stagnations.
So the most fundamental challenge for investors is clear:
How can one navigate a changing investment landscape with a fixed strategy?