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).

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.

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.

Bull Market in Guns and Ammunition in this Bad Bear Market?

Over the last few months, we've seen the next leg down in this terrible bear market. Since the US Election on November 2008 to March 5, 2009, we've seen the S&P 500 go down 28.6% and the Small Capitalization Russell 2000 index go down 34.4%.

But yet, two stocks, SWHC (Smith and Wesson Holdings) and RGR (Sturm Ruger), two Gun and Ammunition companies, have gained 45.8% and 39.8% respectively.



Despite the Current Bear Market, we have had a Bull Market in Guns and Ammunition.

Different Articles, such as from Minyanville, have attributed this boom to two main factors:

1. The new Democratic U.S. Administration is traditionally not friendly to gun rights and gun owners.
   
2. Worsening economy increases crime and mayhem encouraging people to buy firearms and ammunition.
   

Anecdotal evidence also shows the high demand. This Orlando Sentinel article has said that sales of ammunition have been flying off the shelves and there is a high demand for it.

The FBI has reported that background checks on potential firearms purchasers increased 41.6% from November 2007 to November 2008.

Even the earnings report from handgun maker Sturm Ruger (RGR) suggests this national trend. Demand is so high, Sturm Ruger reported over 175,000 of 776,000 units ordered were on back order. Over the last year, the order book grow almost 50% from $156 million to $223 million.

SWHC (Smith and Wesson) is a small capitalization stock ($179 million) with a PE (Price to Earnings) ratio of 13, and a 5 year estimated growth rate of 21.7% for a Price Earnings to Growth Ratio (PEG) of 0.60 (PEG > 2 is expensive, PEG < 1 is a good deal).

RGR (Sturm Ruger) is also a small capitalization stock ($191 million) with a forward PE ratio of 24.

Both stocks appear to have broken out recently out of bases




The trends remain strong, but how long will it last?

If the economy and stock market continue to worsen, higher unemployment would lead to higher crime rates, which can boost sales of guns and ammunition.

We could also currently be in a secular Bear Market that started in 2000 and will end sometime around 2016 or 2017.

Today's SWHC Stock Chart

Today's RGR Stock Chart

Today's CAB Stock Chart

Performance Comparison of SPY, IWM, SWHC, RGR, and CAB

Cabela (CAB), is a retailer of outdoor items such as hunting, fishing and camping equipment.

Profit from Big Government Healthcare Waste

There is a trend towards Big Government and Big Government Health Care, especially with the traditionally Big Government and Big Health Care Democrats having control of both the Executive and Legislative Branch of the United States.

With so much money being spent on Health care, Government sponsored Health care, there is a niche area to recover much of the waste and inefficiencies.

HMS Holdings (HMSY) is an $800 Million company that does just that.

HMS Holdings is the nation's leader in coordination of benefits and program integrity services for government health care programs. The company’s clients include health and human services programs in more than 40 states, 80 Medicaid managed care plans, the Centers for Medicare and Medicaid Services (CMS), and Veterans Administration facilities. HMS helps ensure that health care claims are paid correctly and by the responsible party. As a result of the company’s services, government health care programs recover over $1 billion annually, and avoid billions of dollars more in erroneous payments.

HMSY has a Forward PE of 32.20, and 5 year estimated growth rate of 26%, for a PEG of around 1.25 (PEG under 1 is a value, over 2, is too expensive).

The Stock chart of HMSY is showing strength (as of January 20, 2009), and the stock is above both the 50 day and 200 day moving average even in a bad market.

On January 13, 2009, HMSY has updated its earnings guidance for fiscal year ending December 2008, and due to better than forecasted business performance for the fourth quarter of 2008, the company is revising its 2008 full year EPS guidance from $0.77 to a range of $0.78 to $0.79.

All of this good news is occurring in a bad market.

The Company's website is www.hmsholdings.com.

Profit from Obama's Digital Health Care Initiative

President Elect Obama has an initiative to modernize health care by making all health records standardized and electronic, within five years.

The idea is that the quality of health care will get a big boost, and costs, over the long run, will decline. But this will come at a cost of around $75 billion to $100 billion over ten years according to studies from Harvard, RAND and the Commonwealth Fund.

Can we profit from this?

Some Health Care Information Stocks

1. Athena Health (ATHN): Athena Health provides Internet based business services for physician practices in the United States. "Its service offerings are based on proprietary Internet-based software, database of payer reimbursement process rules and back-office service operations." The company is a $1 Billion company, with a Forward PE of 40, a 5 year estimated growth rate of 32% for a Price Earnings to Growth Rate (PEG) of 1.25 (more than 2 is expensive, less than 1 is a great value).
   
   
2. Quality Systems (QSII) : Quality Systems engages in the development and marketing of health care information systems in the United States. Its system automates various aspects of medical and dental practices, and networks of practices. The company also offers proprietary electronic medical records software and practice management systems. QSII is a $1 Billion company with a Forward PE of 19, 5 year estimated growth of 19% for a reasonable PEG of 1. It even has a forward Yield of 3%
   
   
3. Allscripts (MDRX): Allscripts-Misys Healthcare Solutions, Inc. offers software, services, information, and connectivity solutions that enable physicians and other health care providers to deliver patient safety and clinical outcomes primarily in the United States. It operates in four segments: Professional Solutions, Enterprise Solutions, Health Systems Group, and Medication Services. MDRX is a $1.2 Billion company, with a forward PE of 13.4, a 5 year estimated growth rate of 17% for a bargain PEG of 0.78.
   
   
4. Cerner (CERN): Cerner Corporation provides health care information technology solutions, health care devices, and related services in the Americas, Europe, the Middle East, and the Asia Pacific region. CERN is a $3.1 Billion company, with a forward PE of 15, an estimated 5 year estimated growth rate of 20% for a good PEG of 0.75.
   

Future of Digital Records and Health Care Information Systems

The Future of Digital Records and Health Care Information Systems is bright, even without President Elect Obama's Digital Record initiative.

However, from a short term point of view, there could be challenges. Earlier this month, firm Leerink Swan downgraded ATHN from Outperform to Market Perform. The Analyst Bret Jones said that "Our best guess as to the time line for federal money to work through state grant and loan programs in any material way is at least 12-18 months." Bret Jones also mentioned that the climate for health care IT companies is still very difficult, and investors may be disappointed as they wait for the stimulus package to take effect.

But if we look at the longer term, there is great promise in this area.