By looking at the 65 Year S&P 500 chart and drawing trend lines, it is obvious that we had a normal trend channel from 1950 to 1995, then in 1995, we began an abnormal period where we had a Bubble economy and a Frankenstein stock market from 1995 to the present.
If we look at the middle trend line, if we revert to the mean (and if that middle trend line is the true mean), that means that the S&P 500 Target is 1500 by 2020. This could mean that the S&P 500 could have a blowoff top and then a crash down to 1500, or else, some wild sideways volatile trading and eventually hitting 1500 by 2020. Many combinations are possible if we believe there will be a reversion to the mean by 2020.
Since the S&P 500 is around 1958 right now, that means by the year 2020, we can have an overall decline of around 24%, a long term five year bear market.
A. End of Gold Standard in the United States, 1971:
In 1971, the United States of America ended the Gold Standard. The Federal Reserve now uses Fiat Money, and can print money or raise or lower interest rates at will, without regards to the Gold Standard. This freedom to print money and have a loose monetary policy affected the future economy and stock market, including the long Bubble Economy from 1995 to the present.
B. Something Happened in 1995: “Irrational Exuberance”
Something happened in 1995 which led to Fed Chair Alan Greenspan to declare “Irrational Exuberance” and the stock market went to bubble levels ending up in the 2000-2001 “dot-com bubble”.
C. The Large Baby Boomer Group:
- 1990s: Large Baby Boomer Group reaches peak earnings
- 2010 and later: Baby Boomers starting to retire.
From 2010 onwards, Baby Boomers are going to want to retire. People are living longer, there are many problems with Social Security and Health care costs are increasing, and there will be fewer workers to support the large group of retiring baby boomers since the United States has a Pay-as-you-go system where current workers have to support a growing retired population.
This would support some economic and stock market headwinds in the future.
D. Productivity gains and losses help explain things.
According to the U.S. Bureau of Labor Statistics, from 1973 onwards, we have had increasing productivity in the nonfarm business sector. The decline in productivity from 2007 does support the future reversion to the mean.
The Productivity Change in the manufacturing sector is even more stark, showing a great increase in the 1990s and 2000s, and then a decline from 2007 to 2014. This too, supports a reversion to the mean.
E. Loose Monetary policy, increasing consumer and government debt, The Great Unwind.
Since 2009, the government has been spending a lot of money, printing a lot of money with loose Fed Policy including 0% interest rates and many injections of credit into the system using the Quantitative Easing program. During this time, both government and consumers have been racking a lot of debt including education loans, yet median wage is stagnant, and government has not been getting enough revenue.
Will there be The Great Unwind, and The Great De-leveraging which would also support a contraction and reversion to the mean?