It is my view that there are not sufficiently clear reasons, on balance, to strongly support the view that productivity growth will be significantly higher or lower than it has been on average in the past decade.
The outlook on energy is similarly murky, on a secular basis. The cyclical fundamentals in the energy industry are undeniably bullish, given technological advances brought about by companies such as
in U.S. natural gas fields, as well as exciting developments in the alternative energy arena being spearheaded by companies such as
. Bullish developments in the area of energy conservation and conversion being pioneered by companies such as
are also reasons to support optimism.
However, these bullish cyclical developments are occurring in the context of an undeniably bearish long-term trend of relentlessly rising costs per unit of energy produced. In the long run, there is a gargantuan battle that is taking place between the Malthusian constraints brought about by resource scarcity and the liberating forces of human ingenuity. In the energy arena, it is not yet clear how this portentous battle will ultimately play out.
Thus, the overall secular economic outlook is
supportive of high average long-term valuations. High debt and deteriorating demographic profiles are unambiguously negative factors that, all other variables (such as the outlook for productivity growth) being equal, must cause long-term growth to slow relative to historical averages.
A final note on the secular time frame: When analyzing investment prospective -- investment returns on a long-term time frame -- it is worth noting that even very low prospective historical returns on equity investments on a secular basis must be evaluated against the prospects for alternative investments in the fixed income arena, where prospects appear even worse on a secular basis.
In future writings, I plan to discuss -- within their appropriate time frames -- non-fundamental variables, such as technical and psychological factors, that also play a role in stock price evolution.
However, for now, I will simply observe that fundamental variables must be evaluated within their appropriate time frames. For example, the momentum exhibited by short-term economic variables seems to be slowing and may therefore provide some headwinds for the stock market on a short time frame. At the same time, economic fundamentals and valuations seem reasonably supportive of the stock market in a cyclical context.