Why the 50-year bull market may end with a whimper not a bang

Douglas McWilliams

MY NEXT Gresham professorial lecture has the provocative title “Was Karl Marx always wrong?”, but those wanting a detailed dissection of Marxism should stay away. Rather, I used this to highlight one of the important phenomena of our times – the falling share of labour incomes of GDP. The fall has meant a growing share of national income going to capital.

And the rising share going to capital, coupled with falling yields as the Chinese savings glut starts to hit the world economy, has underpinned the global bull market for equities that has lasted for nearly 50 years.

But what has caused the falling share of labour, and will it continue? In the past 30 years, the world’s non-agricultural labour force has grown by 115 per cent. This has been caused by two factors – an extraordinary growth in population in emerging economies, and a movement out of agriculture into more sophisticated jobs in industry and services. And the IT revolution has made capital machinery cheap.

One detailed US study has suggested that the IT revolution and globalisation have been equally responsible for the fall in the labour share of income. So can this falling labour share – which means a higher share for capital – continue?

We are nearly past the peak of demographic expansion in the emerging economies, and already past it in China and the advanced economies. There is now reduced scope for moving people out of agriculture: those who could leave easily have left, and there will be increasing requirements for food and other commodities.

The growth of the world’s non-agricultural labour force has already started to slow, though the process is gradual in the current decade. Meanwhile, the technological revolution that has generated cheap IT is still moving, but is starting to reach a mature pace of change. And the gains from falling bond yields have largely been factored in by markets, with few expecting the trend to continue downwards.

In 1974, the old FT index bottomed at 150 – equivalent to about 62 on the current FTSE 100. Since then it has recovered more than 100 times over. This growth has funded a successful financial services sector and encouraged equity investment. But the factors driving it are slowly dropping out, or have been factored in. We’ve already had around half the gains from globalisation, and the future gains will emerge more slowly.

So markets are likely to rise more gently in the future. But this does not necessarily mean that, as markets lose momentum, they start to collapse on themselves. People still need to save, and will need to invest to pay for their own old age. And, paradoxically, lower returns mean that they will have to save more, not less. But as the extraordinary returns of the past 50 years come down to earth, I suspect that both investors and fund managers will have to satisfy themselves with making much less from investment.

Douglas McWilliams is executive chairman of the Centre for Economic and Business Research and the Mercers’ School Memorial Gresham professor of commerce. A fuller discussion of this issue will be given in “Was Karl Marx Always Wrong?” at 6pm at the Museum of London tomorrow.