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.

Ten Year Predictions including Global Great Depression, War, and Obama/Romney.

Today is September 24, 2012, and here are some ten year predictions (ending December 2022):

A. United States Elections:

1. President Barrack Obama, Vice President Joe Biden and the Democrats will win the U.S. election of 2012.
2. Following a major stock market crash between 2012 and 2016, the Republicans will win the election of 2016.  However, the defeat of Mitt Romney in 2012, and the bad state of the economy between 2012 and 2016, will temporarily end the reign of the Moderate Republican in the mold of Mitt Romney, Senator John McCain, and President George Bush.  2016 will be the year where the true Conservative or Libertarian Reformer, running as a Conservative,  take over the United States.
3. The election of 2020, as the economy recovers will also be won by the Conservative Reformers elected in 2016 and 2018.

B. U.S. and World Stock Market.

1. Between September 2012 and December 2022, there will be one or more Stock Crashes, possibly even two or three Stock Crashes or long declines.
2. The First Market Crash will be between the years 2012 and December 2015.
3. There will be at least one major tradable cyclical bull market in stocks during the years 2012 and 2022, and the first one might be between the First Crash (between 2012 and 2015) and the Second Crash.
4. By 2020, the U.S. Stock Market as measured by the S&P 500 will be very close to today's level of 1456 or below.
5. Before 2020, we may hit the S&P 500 level of 600-1000.  That's a drop of around 30 to 60% from where we are now.
6. There may be a Global Long Term Secular Bear Market and possible a long term Global Depression rivalling and possibly exceeding the Great Depression lasting till around 2018 to 2022.
7. For those with a twenty or more year long term investing horizon, there will be many great investment opportunities within the next decade as stocks will be on sale and be discounted.

C. U.S. and World Economy

1. U.S. Unemployment is now 8.1% and we will reach unemployment levels of 10 to 14% sometime within the next decade (until 2020-2022).
2. U.S. interest rates might go down a bit more with the Fed's Quantitative Easing 3 (QE3), but the bond bubble will eventually pop, and interest rates will rise causing a lot of problems in the economy.
3. The Debt bubble including U.S. National Debt, State and Local Debt, Consumer Debt, Student Loan Debt, and underwater Mortgage debt bubbles will pop.
4. There will be increasing bankruptcy by individuals, corporations, local government, and even countries.
5. The U.S., State, and local Governments will be paying more interest, at higher rates, on ever increasing debt.
6. The U.S. National Deficit will still be a major problem for many years and the U.S. National Debt problem ($16 trillion and counting) won't be solved easily.
7. Globally aging populations, overspending, and borrowing will doom much of world's economies.
8. The average credit score of U.S. citizens and residents will decrease from September 2012 to 2018 - 2020.
9. The U.S. Standard of Living will remain stagnant or decline from 2012 through 2018 - 2020.

D. Housing:

1. QE3 can keep interest rates and mortgage rates low, but when the Bond Bubble and other Bubbles pop, mortgage rates will rise, making housing less affordable, and putting downward pressure on housing prices.
2. Lending will still be tight, and lower credit scores because of a worsening economy will make it even tighter, reducing demand for housing, and putting downward pressure on housing prices.
3. Another economic downturn and increasing unemployment will hurt housing prices.
4. There will be another round of short sales and foreclosures for the housing double dip.
5. Even if housing prices rise because of tight supply in the short term, the great overhead supply of all those mortgages underwater, will keep a lid on any house price appreciation.
6. U.S. National Home prices will remain stagnant or decline over the next six to eight years till 2020.

E. Education:

1. The Higher Education Bubble of increasing student tuition and student debt will finally pop.  There will be a greater number of student loan defaults.
2. There will be proposals trying to reform Education especially Higher Education.  The proposals will include encouraging private companies and alternative education companies.
3. There will be private companies who may try to make education more efficient, including providing high tech education tools, provide trade school training, and encourage electronic and distance learning.
4. There might be a rise of cost efficient higher education centers which includes schools that focus primarily on education without the investment in sports, electives, and expensive or impressive buildings.
5. Prospective college students will be choosing their major mainly based on the Return on Investment since higher education will still remain expensive despite attempts to reduce costs.  Parents will try to dissuade their college aged children from taking lower return on investment majors such as Art.

F. Investments and Careers:

1. Healthcare companies will continue to do well as baby boomers retire and the population ages.
• Companies such as Gilead (GILD) and Johnson and Johnson (JNJ) could do well.
• Even companies such as HMS Holdings (HMSY) which benefits from Government Healthcare Waste could do well.
• In the attempt to be more efficient, the Digital Healthcare Systems and Digital Healthcare Records field might still do well with companies such as Cerner (CERN), Quality Systems (QSII) and AllScripts (MDRX).
2. Healthcare field and careers will continue to do well, and there may be a boom.
3. Answering the question: "Where will Baby Boomers spend their money?" when they retire might produce good investment results.  Aside from healthcare, consider entertainment companies including Cruise Ship Company, Carnival Corporation (CCL).
4. Gold may continue to be strong as a stable currency as countries debase their currency by continuing to print money, especially the United States.
5. Consumer Staple companies such as Procter and Gamble (PG) and Pepsi (PEP) may continue to do well.  Ask the question: "What will people continue to buy during a major economic downturn?"
6. Select trend changing companies might do well.  Apple (AAPL) was that company for many years.
7. The technology field will continue to do well, as people look to technology to improve efficiencies and productivity to do more with few workers as the population ages.  Technology can include companies like Monsanto (MON) which creates drought resistant crops and more productive crops.
8. There are financial companies which can continue to do well during downturns.  These could include companies such as Pawn Shop and Payday loan companies EZCorp Pawn  (EZPW) and First Cash Financial (FCFS).  There's even Portfolio Recovery Associates (PRAA), a company that attempts to collect defaulted loans, as defaulted debt increases in the scenario above.
9. The education field might continue to be a stable profession, especially with the Echo Boomer Demographic.  However, with fewer babies being born, there might be a limit to the growth in the education field.  This could be helped as the country encourages younger immigrants to immigrate to make up for the fewer American born babies.
10. Stable companies with good cash reserves, and which provides good, steady, or even rising dividends even during market downturns are possible investment contenders.

G. Immigration, Families, and Society

1. During the major downturn, there will be talk in the media discussing demographics and the role of an aging population.
2. Four (2016) to eight (2020) years from now, as this discussion takes place, law makers will propose incentives to have more American born babies.  There will also be proposals to loosen immigration laws to encourage immigrants with special skills, and young workers to emigrate to the United States.
3. Other countries with ageing populations will propose similar policies.
4. China might eventually end their one child policy.
5. Crime will increase.  There may be more violent gangs and thugs and the police can be powerless or not have enough resources to fight back.  There will be programs to make police more efficient and to do more with less.
6. There can also be a rise of vigilantism and people may try to band together to defend their families, their property and their neighborhood.
7. Household formation will still remain low.  There will still be a lot of youth and young adult employment.  Many will still be staying with their parents for many years, and may even continue to live at home when they marry.  This might be good for home improvement companies such as Home Depot (HD) or Lowe's (LOW) which can benefit when families choose to renovate homes, renovate basements and add extensions to support extended family.  Houses will become more multi-generational.
8. There will be many protests in the street and around the country, and some may turn violent and turn into riots.  These protests would be more widespread than the protests and riots of the "Occupy Wall Street" movement.  This would happen more often after the downturn, and as people realize that the current path, and the current expectation of government benefits cannot be sustained and that fiscal tightening is necessary.

H. U.S. Government

1. Fed chief Ben Bernanke may not have the job as the Fed Chief beyond 2014.  If the Republicans win the 2012 election, he will be replaced.  If the Democrats win the 2012 election, and if the bad downturn in the economy occurs before 2014, Ben Bernanke will also be replaced as the Fed Chief.
2. After the Bubbles pop, there may be fiscal tightening, which may affect people's standard of living.  Everyone will have to have lower expectations.  Different fields from the Military, to Entitlement programs, to subsidies, to government guarantees, to bailouts, to FDIC guarantees may all be reduced or cut.
3. With so many more people having lower credit scores, some politicians may try to give amnesty to people with lower credit scores.
4. There will be serious discussion about getting back to the Gold Standard.  Law Makers may even propose it, but it may not be made a law.
5. Between 2016 to 2024, there may be many reforms and laws made to abolish or limit the "Fed", the Federal Reserve.

I. Terrorism, Conflict, and War.

1. There could easily be military conflict or even war involving one of the countries such as Iran and Israel.
2. Since the economy of the U.S. is likely going to go downhill, any conflict will push the United States further downhill.  There will be tough decisions that need to be made whether to spend money and resources to fight the war.  What if Iran decides to attack the U.S. when Israel attacks Iran?
3. Cyber War will be a common form of terrorism, and bands of international cyber terrorists will launch attacks on the United States and other countries.
4. Chinese will have a surplus of bachelor men which could lead to internal violence and crime, or it might encourage China to flex its muscle causing great tension in the region.  Will the United States defend any ally from attacks?  Will the United States just watch as China takes over contested land?  What will the U.S. do?
5. There may be other terrorist and other criminal attacks on the United States and U.S. interests around the world.  Rather than directly attacking the United States mainland, U.S. interests around the world will be attacked, including U.S. citizens.  What will the United States response be?
6. The new leaders of 2016 will create a new Foreign Policy Doctrine to determine the conditions whether the U.S. should be in a war or not, and to help define Appropriate Response to attacks on the United States, United States interests, U.S. allies, and U.S. Citizens around the world. 
7. From 2016 to 2024, internal discussions in the White House will be held in private to determine whether to follow the Bush Doctrine, or to modify it, or create a new foreign policy and national U.S. security doctrine. 
8. The military, before any war begins may have its budget cut.  There will be a push to make the military more efficient and cost effective.

Aging Population Will Cause Great Bear Market to Last till 2025: The M/O Ratio

The Aging U.S. Population Demographic will put great pressure on the Stock Market and cause Stock Crashes and Stagnation for many years, only recovering in 2025.

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.