Zheng Liu and Mark M. Spiegel made a great observation and they found that there is a direct correlation between the Market's Price to Earnings Ratio (P/E) and a Demographic Ratio called the M/O Ratio.
M == Number of people in U.S. between the ages of 40 and 49
O == Number of people in U.S. between the ages of 60 and 69.
Since 1954 to the present, this M/O Ratio has correlated with the market's P/E Ratio.
The theory is that those aged 40 to 49 are the main consumers and main producers. And those in their 60s are in the retiring age, and those in that demographic will likely sell stocks. So if the number of people in the "O" Demographic who will likely be selling stocks greatly outnumbers those in the "M" Demographic who are both producing and consuming, then the stock market will be pressured downwards.
When we project the P/E Ratio into the future based on the M/O ratio, the P/E Ratio is theoretically expected to drop from 15 in 2010 to about 8.4 in 2025 and recovering to 9.4 in 2030.
This research suggests that the U.S. (and the World?) might be headed to a long term Bear Market which will last a long time, only recovering around the year 2025.
This matches previous analysis by this blog speculating that we are near a Major Market Top, and that the Debt Crisis, and Demographics will cause a long term Secular Bear Market.
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