The Demographic Headwinds

The S&P500 crept up just under 1 percent last week on low volume.  Although the VIX (or fear) index is at a low (complacent) level, it contradicted the price rise by also rising slightly.  This suggests that traders are buying more insurance to protect themselves against price possible price drops. 

The macro data were mixed to weak.  The US Treasury reported a $221 billion budget deficit for February–the largest monthly deficit ever in the history of the nation.  Initial jobless claims were slightly worse than expected.  The US trade deficit for January was slightly less awful than expected, but this happened more because imports fell than because exports boomed.  And the drop in imports is hardly a good sign for economic recovery.  February retail sales were better than expected, but only because the January sales were revised down so much than the February number suddenly looked better by comparison.  Consumer sentiment was lower than economists had expected, and so were business inventories.

Technically, the S&P’s weekly charts show a strong negative divergence.  While prices have bounced back to January highs, many other leading technical indicators are pointing to an imminent decline from an overbought level.  The daily charts are screaming that equities are overbought and due for some sort of pullback.

Barron’s recently presented a piece from Thomas Kee, who runs Stock Traders Daily.  Mr. Kee researched the correlation between overall stock prices and people’s peak investment cycles.  Specifically, he focused on people, in their mid forties, who tend to maximize their savings rates in preparation for retirement.  Clearly, if more of the population is saving, then the additional flow of funds into the capital markets would tend to be positive for equities.

His findings were strikingly correlated with the major stock market phases–secular bull and bear markets.  The periods of declining investment closely matched the stock market falls in the 1930’s and the 1970’s.

Where are we today?

According to Kee, we’re headed for another stretch of trouble.  His investment rate indicator peaked in 2007 and turned sharply downward since. 

How long might this downturn last?

Prior secular downturns lasted at least ten years, and this demographically driven drop in investment looks like it will last almost 15 years.  According to Kee, the investment rate won’t turn back up until 2023. 

Could it be time to batten down the hatches?

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