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.

S&P 500 Stock Market Crash?: $16 Trillion in National Debt and Bad Demographics

Is the Stock Market and the U.S. S&P 500 in Denial and is a Stock Market Crash Ahead?

Since the great stock market crash of 2008, the U.S. Stock Market has gone up from an S&P 500 low of 683 to 1432 today, September 6, 2012 for a gain of 110%.

However, during the same time, the United States National Debt went from $10.6 Trillion Dollars to today's $15.86 Trillion Dollars for a gain of 50%.

If we look at the ratio of U.S. Debt to GDP (Gross Domestic Product), we went from 74% Debt to GDP towards the end of 2008, to around 101% today, September 6, 2012:

 

 

[Numbers Here]

Is the Stock Market in Denial? 
National Debt and Bad Demographics means Trouble Ahead for the Markets.

The Stock Market has gone up over 100% since the bottom in 2009, but at the same time, the National Debt has reached a record $16 TRILLION, and now, the ratio of U.S. National Debt to GDP is over 100%.

Recently, for the first time ever, the Bond Rating Agencies downgraded the United States Credit Worthiness.

Also, there was a recent budget impasse in the U.S. Government, and the U.S. appears to be nearing a fiscal cliff.

The interest on the national debt alone will top more than $5 trillion over the next decade according to the projections from the Congressional Budget Office.

And there is no sign that this trend will slow down and reverse itself anytime soon, unless drastic and proactive actions are taken.

Bad Demographics:

Bad demographics will make this bad situation worse.   One of the largest demographic groups in the U.S., the Baby Boomers born soon after World War II, are starting to retire and will be claiming Social Security Benefits, and Medicaid benefits.  The Baby Boomers will also be living longer, putting a further strain on the system.

The hope is that the younger generations can fill the gap, but that's a problem, with high young adult unemployment rates, the young having to move home after College, and increasing debt and increasing college tuition costs.  Labor participation as a percentage of population has been decreasing and will continue to decrease, which it makes it more difficult to grow the economy.

Edge of Fiscal Cliff:

We are on the edge of a fiscal cliff, and important very active steps need to be taken to solve this dire financial problem.

The Stock Market could also be in Denial, and there is a risk of a gradual or sudden downturn which may occur soon, or over many years in the future.  There may be many Stock Market Corrections and Crashes and Violent Rallies in our future.

Despite the recent bull market since 2008, we are still in the middle of a Long Term Secular Bear Market.  The Stock Market is currently in Denial with many headwinds from a National Debt Crisis and Unfavorable Demographics.

U.S. S&P 500 Stock Market to Stagnate for Five Years in Secular Bear Market

The U.S. Stock Market, as represented by the S&P 500 Index, could stagnate for a long time period (such as five years).

Long Term S&P 500 Price Channel Since 1950



Since 1950, the S&P 500 Stock Market has been in a consistent price channel, until the year 1995, when the S&P 500 starts the runup at an unsustainable rate, until the peak in 2000. During the time period starting in 1995, the S&P 500 has gone above the long term Price Channel.

We are just starting to see the S&P 500 get back to the top of the normal long term price channel.

In the Reversion to the Mean Theory, this means that the S&P 500 will have to trade sideways for some time to remain consistently in the channel.

Based on the lines above, the S&P 500 should be trading around the level of 500 to 1200.

Five years from now, the S&P 500 could be trading from the 600 to 1500 level, to remain within the long term price channel.

We are in middle of 17 Year Secular Bear Market

Over the long term, the U.S. Stock Market Appears to be in Bull Markets or Bear Markets (Secular Bull Market and Secular Bear Market) for an average of 16 to 17 years.

One grouping consists of:

1. 1906-1921: Secular BEAR Market
   
2. 1922-1928: Secular BULL Market
   
3. 1929-1949: Secular BEAR Market
   
4. 1950-1965: Secular BULL Market
   
5. 1966-1982: Secular BEAR Market
   
6. 1983-1999: Secular BULL Market
   
7. 2000-????: Secular BEAR Market
   

This means that if the current Secular Bear Market started in 2000, and if the average Secular Market consists of 16 to 17 year time periods, then a new Secular Bull may start around the year 2016 or 2017, consistent with the Price Channel Behavior above.

More Details on Secular Bull and Bear Markets including Charts

Today's S&P 500 Chart

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.

Stock Market (S&P 500) Breakdown to New Levels Has Begun

For the last three to four months, the Stock Market, as represented by the S&P 500 has been trading in a symmetrical triangle pattern. This blog has been saying that breakout would occur soon, sometime during February.

On Tuesday, February 17, 2009, the S&P 500 has finally broken down from the symmetrical triangle and is starting a new downtrend.



There is major resistance at around the 740 to 760 level from the November 2008 lows of 741, and the major low of 768 during the last Bear Market from 2000 - 2002.



While the stock market could bounce off these lows again, based on the breakout from the symmetrical triangle pattern, we could hit a low of 558 on the S&P 500. [Since the maximum range of the previous triangle is 267 (1007 - 740 = 267), we apply this to the breakout point of 825 to come up with a downside target of 558 (825 - 267 = 558)]

This matches this blog's analysis of a S&P 500 bottom of 450 to 600.

Notice that if we break down below the major S&P 500 bottom of 740 to 768 on the S&P 500 set in 2002 and 2008, there is not much support below:



We do appear to be in the middle of a long term secular bear market that started in 2000 and will end around 2016.

Today's Chart of S&P 500

Secular Bull and Bear Markets; Cyclical Bull and Bear Markets

According to Wikipedia, "A secular market trend is a long-term trend that usually lasts 5 to 25 years (but whose distribution is more or less bell shaped around 17 years, in the stock market), and consists of sequential 'primary' trends."

A Cyclical Market trend is a shorter term trend lasting around two to four years.

A Bull Market "tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future price increases and future capital gains."

A Bear Market, "is described as being accompanied by widespread pessimism. Investors anticipating further losses are often motivated to sell, with negative sentiment feeding on itself in a vicious circle."

Some would refer to the current market starting in 2000 as the beginning of a longer term Secular Bear Market, with a Cyclical Bull Market occurring between 2003 and 2007.

Secular Markets in History

Market Analysts and Historians would group the stock market periods from 1906 between Secular Bull Markets and Secular Bear Markets.

One grouping (by Amateur-Investor.net), would be as follows:

1. 1906-1921: Secular BEAR Market
   
2. 1922-1928: Secular BULL Market
   
3. 1929-1949: Secular BEAR Market
   
4. 1950-1965: Secular BULL Market
   
5. 1966-1982: Secular BEAR Market
   
6. 1983-1999: Secular BULL Market
   
7. 2000-????: Secular BEAR Market
   

How the 1950 to 1965 Secular BULL Market Looked Like



The Clear Trend is a powerful Bull Market.

A Buy the Dip strategy would have been profitable during this period.

How the 1966 to 1982 Secular BEAR Market Looked Like



Many say that we are in the middle of a Secular Bear Market which started in 2000.

If this is so, then we can look at the last Secular Bear Market, the Period between 1966 to 1982.

What is interesting is that even in this Bear Market, the Stock Market did rise, but at a much slower rate than during a Secular Bull Market. The Average Yearly Return on the S&P 500 (according to Amateur-Investor.net) during this period was 3.64%. Compare this to the Secular Bull Markets from 1922-1928 (17.90%), 1950-1965 (11.40%) and 1983-1999 (14.96%).

Also notice the general sideways action but with violent swings in the market.

We see Drops of 33%, 47%, and 23%, and Gains of 42%, 64%, and 122%.

So even in Bear Markets, it is possible to make good gains in the market if traded correctly. Of course, trading correctly (and calling market tops and bottoms) is difficult.

Using an index strategy, it would appear that even in Bear Markets, buying the index when the market drops 30% to 40% from a market peak would be profitable, in preparation for the next big gain in the next Secular Bull Market.

In fact, this blog studied the one year forward return based on an index's relation between the 52 week high and 52 week low. The more overextended the index in relation to the 52 week high (and the more underextended the index in relation to the 52 week low), the greater the one year forward return.

How the 1983 to 1999 Secular BULL Market Looked Like



Clearly, the primary market trend during this long period was up. There was a scary drop in 1987 (Black Monday), but during this entire period, this drop was just a small blip.

Accumulating stocks/equity during the long bear market from 1966 to 1982 would have paid off before the start of the powerful 1983 to 1999 Secular Bull Market.

How the 2000 to ???? Secular BEAR Market Looks Like



If we are in a Secular Bear Market lasting around 17 years, then if the Secular Bear Market started in 2000, the Secular Bear will end around 2016.

If the 1966 to 1982 market is any indication, we will be in for a wild ride in the market, as we have already experienced.


Today's S&P 500 Chart