The rule sounds simple: always invest in the cheapest asset class from the previous period. The result over several cycles:15.78% p.a.— significantly more than every single strategy, every star portfolio and most hedge funds. And yet hardly anyone uses this approach. Why? Because countercyclical investing goes against every human instinct.
This article combines two powerful concepts: the Shiller CAPE as a valuation indicator and the 18-year supercycle between stocks and commodities. Together, they create a strategy that is based not on forecasts but on valuation data — math instead of gut feeling.
The Shiller CAPE: The best long-term indicator
TheCyclically Adjusted Price-to-Earnings Ratio(CAPE), developed by Nobel Prize winner Robert Shiller, compares the current share price to the inflation-adjusted 10-year average profit. By smoothing over a full economic cycle, it eliminates short-term earnings fluctuations and provides a robust signal about fundamental valuation.
The empirical evidence is clear: a high CAPE value indicates expensive valuations and predicts low expected returns over the following 10 years. A low CAPE indicates cheap valuations and predicts high returns. Over 10-year horizons, this signal performs with remarkable reliability.
The current assessments (as of thesis):The US market is trading at a CAPE of over 30 — more expensive than before the dot-com crash of 2000. Developed market stocks are moderately valued. Emerging markets show low CAPE — historically the signal of outperformance. And commodities are at historic valuation lows relative to stocks.
The implication: Anyone who holds 50% of their portfolio in US stocks today is investing in the most expensive asset class in the world. Those who think counter-cyclically overweight the cheap asset classes - emerging markets, raw materials, international stocks - and reduce their exposure to the US market.
The 18-Year Supercycle: Bannister & Forward
Stocks and raw materials have changed dominance in regular cycles for over 200 years. Bannister and Forward's research quantified this pattern: All18 yearsthe relative performance shifts.
Historical cycles tell a consistent story: from 1906 to 1923, commodities dominated, stocks were weak. From 1923 to 1942 the picture changed - stocks boomed until they crashed, raw materials weakened. The post-war boom from 1942 to 1966 belonged to stocks. The phase from 1966 to 1982 — stagflation, oil crisis — became a commodity supercycle, while stocks had negative returns in real terms.
Then came the mega bull market from 1982 to 2000: stocks rose by over 1,000% and raw materials fell. Since 2000, the picture has been mixed — stocks volatile, commodities at cycle lows. If the historical rhythm holds, everything points to younew raw material supercycle from around 2018-2036.
The GSCI/DJIA ratio — the quotient of the Goldman Sachs Commodity Index and the Dow Jones Industrial Average — confirms this thesis. It was on one in 2020historic low, comparable to levels in 1970 and 1998. Both low points were followed by massive commodity rallies, each lasting more than a decade.
The Contrarian strategy: 15.78% p.a. over 4 periods
The countercyclical strategy combines the findings from CAPE and super cycles into a concrete rule of action: In each period, investments are made in the asset class that was valued most favorably in the previous period.
The result over several historical cycles:15.78% p.a.— a return that is well above the average for each individual asset class. For comparison: US stocks returned 9.30% p.a., gold 7.86% p.a., commodities 7.51% p.a. The countercyclical rotation between these classes generates significant added value.
Why does this work? Three fundamental forces drive countercyclical outperformance:
1. Mean Reversion:Overvalued asset classes tend to normalize in the long term. A CAPE of 30+ will sooner or later return to the historical mean — through price declines or earnings growth. Undervalued classes experience the opposite: their rating normalizes upwards.
2. Behavioral Finance:The masses buy high (FOMO - Fear of Missing Out) and sell low (panic). This systematic misconduct by the majority creates opportunities for disciplined contrarians. If everyone buys US stocks, their valuation will rise above fair value. If everyone avoids commodities, their valuations fall below fair value.
3. Value Premium:Cheap assets have higher long-term returns than expensive ones. This phenomenon — documented by Fama and French for stocks — also applies across asset classes. A low CAPE today is the best predictor of high returns over the next 10 years.
What this means for current portfolio construction
The CAPE signals and super cycle data provide a clear picture for the current asset allocation:
US stocks: Only 11% instead of the usual 20-50%.The US market is expensive on a CAPE basis. That doesn't mean a crash is imminent — overvaluations can last for years. But it means expected 10-year returns will be below average. Underweighting is the rational answer.
Emerging Markets: 12% — overweight.Low CAPE ratings, demographic tailwinds and economic growth above developed market levels. Countercyclically the more attractive alternative to the overvalued US market.
Commodities: 25% — heavily overweight.The GSCI/DJIA ratio is at historic lows, the 18-year supercycle points to a commodity phase, and when inflation rises, commodities are the natural hedge — themarethe inflation. With an expected inflation rate of 6.2% p.a., commodities offer the highest expected real return of all asset classes:9.80%.
Gold: 20-25% – as a diversifier.Moderately valued, correlation of 0.02 to stocks, 15.3% p.a. with negative interest rates. Gold is not the cheapest building block, but it is the most robust diversifier. Details in ourGold analysis.
Developed market equities: 17% — fairly weighted.Cheaper than the US market, but not as cheap as emerging markets. A moderate position that offers geographical diversification.
The psychological hurdle: Why almost no one makes it
If countercyclical investing is so profitable, why does almost no one use it? The answer lies in human psychology — and it explains why the strategy works:
Investing against the consensusfeels wrong. If everyone is buying US tech stocks and prices are rising, then buying commodities and emerging markets requires an inner conviction that most people lack. The social costs of being different are real: you miss the party that others are celebrating.
Cheap assets are often cheap,because everyone avoids them. There are always good reasons why a market fell — geopolitical risks, economic problems, negative news. The contrarian must be able to separate these short-term issues from long-term valuation signals.
Need countercyclical strategiespatience. The horizon is 3 to 10 years. In the meantime, the overvalued asset class can continue to rise and the cheap one can continue to fall. Anyone who measures performance quarterly is going crazy. Anyone who thinks in decades will be rewarded.
The solution:Quantitative signals instead of gut feelings.CAPE, GSCI/DJIA, supercycle position — these indicators provide objective data that replaces emotional decisions. Not opinion, but mathematics. Not forecasts, but evaluations.
Conclusion: Buy what is cheap - systematically
15.78% p.a. is not a promise. They are a historic result of a consistently countercyclical strategy. The future will be different than the past — but the fundamental forces that make countercyclical investing profitable have not changed in 200 years: mean reversion, behavioral finance and the value premium.
The CAPE indicator says clearly today: US stocks are expensive, emerging markets and raw materials are cheap. The supercycle says: Commodities are at the start of a potential 15-year phase. The inflation data says: material assets are needed like rarely before.
The question is not whether these signals are correct — they are historically robustly documented. The question is whether the individual investor has the discipline to trade against the consensus. The mathematics speaks for itself. Whether one follows it is a question of character, not knowledge.