Story of U.S. Stock Market in One Chart, 1975 to 2035

The Story of the U.S. Stock Market (S&P 500) in One Chart from 1975 to 2035:

The Chart above tells the story of the United States Stock Market (as represented by the S&P 500 index) from 1975 to 2035.

Baby Boomers are the largest demographic group in the United States born around 1946 to 1960, right after World War II.

In the 1980s and 1990s, the Baby Boomers were in their Peak Earning Years and they earned, consumed, spent, and invested for their retirement.  This was helped in 1995 by an increase in the Money Supply, and the Printing Money Started leading to Fed Chief Alan Greenspan to proclaim that there is 'Irrational Exuberance'.  This finally lead to the peak of the Tech Bubble in the year 2000.

The Tech Bubble and Dot-Com Bubble burst, and interest rates remained low, and with loans being very easy to get (including no downpayment loans, and no proof of income), the housing market started its ascent into the stratosphere ending in the 2007-2009 Housing Bubble Peak and Burst.

The market tried to recover, thanks to Fed Chief's Ben Bernanke policies keeping interest rates very low, and printing money with three rounds of Quantitative Easing (QE1, QE2, QE3).  This occurred in conjunction President Obama's increased spending and stimulus plans following the Keynesian way of spending government money to get out of a recession.

We are currently now in the Debt Bubble (consumer debt, state and local debt, international debt, and federal government debt where the U.S. Federal government owes $16 Trillion dollars amounting to over 100% of GDP, and this amount is continuing to grow), a Spending Bubble, and a Government Bubble.  These bubbles will eventually burst.

And starting in 2011, the Baby Boomers are starting to retire, and the Aging Population starts to put pressure on the economy.   The dependency ratio (65 years and older and 0-15 years old to the total population) is going to increase through the years, adding to the burden, and hindering economic growth.

In addition, since the United States Debt to GDP Ratio is now 100% and growing, there will be a long term debt overhang.  There is a study by Carmen Reinhart (Peterson Institute for International Economics, NBER,  CEPR), Vincent Reinhart (Morgan Stanley) and Kenneth Rogoff (from Harvard University and NBER) that shows those cases in history where debt to GDP exceeded 90%, experienced suboptimal growth lasting an average of 23 years.

There are many signs pointing to continued economic stagnation, decline, and possibly recession and depression over the next twenty to thirty years (2032-2042).

What does the U.S. Federal Government Spend Money on?

What does the United States Federal Goverment Spend their money on?

In 2012, the breakdown is as follows:

In the chart above, over 62% of the 2012 US Federal Budget was spent on Entitlements including Health Care, Social Security, Pensions, Medicare and Medicaid.  The next largest group is National Defense at 19%.  Net Interest is at 6%, and that leaves 13% for all other spending including subsidies, major Departments, Education, and Foreign Affairs. 

Since in 2012, spending as a percentage of GDP was 23% and revenue was 16.1% (with the long term average revenue as a percentage of GDP from 1944 to 2012 to be around 18%), that is a large percentage difference just to break even on the deficit. 

Let us say that we can bring up revenue to the long term average of 18% of GDP, and that means to break even, the United States would have to cut spending by around 20%. 

This means that even if we spread the reductions over many years, we would have to raise Revenue to 18% of GDP and then cut the Entire National Defense Budget.  Or, raise Revenue to 18% of GDP, cut the National Defense Budget in half, and then cut all Foreign Affairs, the entire Education budget, and almost all Departments and subsidies.  This is going to be painful even if we spread it out over many years.

Looking forward many years, it will even be worse.

In the chart above, we see that Entitlements (Medicaid, Obamacare, Medicare, Social Security) and Net Interest are going to completely dominate the U.S. Revenue as a Percentage of GDP.

This makes intuitive sense.  Net Interest should rise because we already have $16 Trillion in U.S. Federal National Debt, and we are adding more each year with large deficits, and Interest Rates are likely going to rise.  Entitlements would continue to increase because of the Aging Population, Retiring Baby Boomers (starting in 2011), and more expensive medical costs.

This is not sustainable.  Major reforms will have to be be done including and especially major Entitlement reforms or else this U.S. Economy will have a major collapse or another Great Depression.

About the Data:

Data from the Office of Managment and Budget, the Congressional Budget Office (Alternative Fiscal Scenario), and charts produced by Heritage. 

Does Taxing the Rich Help Increase U.S. Revenue as a Percent of GDP? (Historic Range: 1934 to 2011)

Does increasing the top marginal tax rate on the rich help the U.S. Revenue Problem?

In the chart above, the lower green line is the U.S. Revenue as a Percentage of GDP from 1934 to 2011.  From 1944 to 2011, the Average U.S. Federal Revenue as a Percentage of GDP was a steady 17.8% with the highest being 20.9% of GDP in 1944, during World War 2.  From 1944 to 2011, the U.S. Revenue as a Percentage of GDP remained in a relatively constant narrow band, despite the large range of tax rates during this time.  (Different Tax Rate Graph from VisualizingEconomics.com and PolicyGrinder.com)

The upper red line is the top marginal tax rate.  Despite the large changes in the top marginal tax rate (from 92% in the 1950s to 28% in the 1980s), the U.S. Revenue as a Percentage of Gross Domestic Product remained relatively constant.

From 1950 to 1963, the Top Marginal Tax Rate averaged between 91 and 92%.  The U.S. Revenue as a Percentage of Revenue during this time was 17.4%. 

From 1988 to 1989, the Top Marginal Tax Rate was 28%.  The Revenue as a Percentage of Revenue during this time was 18.3% (even higher than the 1950 to 1963 time period).

This observation of a steady U.S. Revenue as a Percentage of GDP is often called Hauser's Law.

Chart created by this techfarm.blogspot.com site, and data from the Tax Policy Center.

Does the U.S. have a Spending or Revenue Problem? US Debt and Deficit

Does the United States have a Revenue Problem or a Spending Problem?

Since 1960, the United States has been on a Spending Trajectory, and the annual deficit over the last four years has been over $1 Trillion Dollars.

The Current U.S. National Debt is around $16 Trillion, and it is now over 100% of GDP (Gross Domestic Product).

But is it a U.S. Spending Problem or a Revenue Problem?

In the chart above, we see Spending and Revenue as a Percentage of GDP. 

Revenue since 1960 has remained in a narrow range of GDP and averages 18.1% over that time.  In that time, even if tax rates vary significantly, the Revenue has stayed in this narrow range with an 18.1% of GDP average.

Spending, on the other hand, has averaged 20.2% of GDP.  Since the Government can continue to borrow (with the Federal Reserve printing money), and since Government can continue to spend without any solid limit, you can easily forecast spending to continue growing.  When you consider a bulk of those annual payments goes to Social Security, Medicare and Medicaid, and since the U.S. Population is Aging and the Baby Boomers are starting to retire starting in 2011, you can imagine spending to continue to increase as a percentage of GDP.

So with Spending continuing to increase as a percent of GDP, and Revenue remaining a relatively constant 18% of GDP, you can see how the U.S. Debt Problem can grow year after year to create a crisis economic situation possibly leading to long term decade or multi-decade economic stagnation, or recession or depression.

The Problem the United States is having is a Spending Problem and not a Revenue Problem.

The Data:

Charts were created by this site, and Heritage.org, and data from the Congressional Budget Office.
The Spending and Revenue Chart above is based on the CBO's 2012 Long Term Outlook report, using the Externded Alternative Fiscal Scenario, Table 1-2. 

Trading the Largest 16 Year Stock Market Trading Range: Major Market Top or Breakout

The U.S. Stock Market as represented by the S&P 500 Index is in a major 16 Year Trading Range from 1997 to 2012.

The Low of the trading range is around 666, which was reached January 2009.  The S&P 500 last reached that level around the 1996-1997 timeframe.

The High of the Trading Range reached a level of 1576 on October 2007.

The S&P 500 is currently trading at 1444, around 9% below the all time highs.

There is Major Stock Market Resistance around the 1550-1576 level.

One Trading Range Strategy could be:
1. Take Profits or Sell the S&P 500 between here and the 1550 to 1576 level.

2. If the S&P 500 has a solid breakout past 1576 with confirmation, Buy the S&P 500 with a Stop Near Support (around 1576).

3. If the S&P 500 reaches near the bottom of the trading range channel (a drop of 54% from here (1444)), Buy the S&P 500 (or cover the S&P 500 Short Position)

4. If the S&P 500 breaks down below the bottom of the trading range channel (below 666) with confirmation, Sell the S&P 500, with a Stop Near Resistance (666).

So even if the S&P 500 stays within the Large Trading Channel, that could still mean very large drops (or rallies) in the Stock Market as represented by the S&P 500.