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Investors to Bull Market: Fly Us to the Moon

Investors to Bull Market: Fly Us to the Moon
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Monday, 23 October 2017 10:26 AM Current | Bio | Archive

Strategy: Bull’s Theme Song. The last significant correction during the current bull market occurred from November 11, 2015 through February 11, 2016, when the S&P 500 fell 13.3% to bottom at 1829.08 (Fig. 1). The S&P 500 is up 40.8% since then, which in normal times would be a decent bull market all by itself. It is up 22.7% y/y, near the best readings since the beginning of 2013 (Fig. 2).

Last year on May 23, when the S&P 500 was back up to 2048.04, Joe and I observed that it still had failed to take out the previous record high 2130.82 reached on May 21, 2015. We wrote: “While these flat market trends suggest that it has been a ‘Seinfeld market’—i.e., nothing much happening over the past year—there has been significant volatility on occasions, which could certainly recur.” When the S&P 500 broke to record highs during the summer of 2016, we amended our spin as follows on July 12: “The rally in stock prices to new record highs is somewhat reminiscent of a Seinfeld episode. It is happening because not much is happening other than interest rates are at record lows.”

This year on May 3, we elaborated on our theme as follows: “‘The Pitch’ is the 43rd episode of the TV sitcom Seinfeld. It is the third episode of the fourth season. It aired on September 16, 1992. In it, NBC executives ask Jerry Seinfeld to pitch them an idea for a TV series. His friend George Costanza decides he can be a sitcom writer and comes up with the idea of “a show about nothing.” The bull market in stocks since March 2009 has had a fairly simple script too. As a result of the Trauma of 2008, investors have been prone to recurring panic attacks. They feared that something bad was about to happen again, so they sold stocks. When their fears weren’t realized, the selloffs were followed by relief rallies to new cyclical highs and to new record highs since March 28, 2013.”

With nothing bad happening, the path of least resistance for the stock market has been up to new record highs. Perhaps it is time to move on from the Seinfeld analogy. Instead, consider the possibility that the bull market has a theme song now, namely “Fly Me to the Moon,” sung by Frank Sinatra:

Fly me to the moon
Let me play among the stars
Let me see what spring is like
On Jupiter and Mars ….

Stock investors are certainly singing along:

Fill my life with song
And let me sing for ever more
You are all I long for
All I worship and adore
In other words, please be true
In other words, I love you.

Until this year, the bull market had been widely described as the most hated bull market in history. Now it seems to be one of the most beloved. Go figure! The bull continues to return the love to his adoring fan base, which seems to be growing rapidly. Consider the following:

(1) Bull-Bear Ratio. The bull market has plenty of supporters, as is obvious by its unidirectional move to the upside since late last year. Investors Intelligence reports that the Bull-Bear Ratio rose to 4.00 during the week of October 10 and remained elevated at 3.95 last week (Fig. 3). The percentage of bears is just north of 15.0 over the past two weeks.

(2) Leading the way. This year, investors have certainly fallen in love with Information Technology, Industrials, Financials, and Materials. Joe and I gauge the momentum of the S&P 500 sectors by tracking their 200-day moving averages (Fig. 4, Fig. 5, and Fig. 6). Here are their 200-dma ytd performance derbies: Information Technology (23.9%), Financials (23.4), Industrials (14.7), Materials (12.9), S&P 500 (12.9), Consumer Discretionary (11.2), Health Care (8.5), Utilities (6.0), Consumer Staples (3.4), Real Estate (0.3), Energy (-1.7), and Telecommunication Services (-5.1). Lagging, but with admirable gains, are Consumer Discretionary and Health Care. The focus on cyclical stocks suggests that investors are expecting that the economic expansion may last for a while.

(3) Fed heads. The question of who will replace Fed Chair Janet Yellen should be troubling the stock market. It seems to have gotten the attention of the US Treasury 10-year bond yield, which is up from this year’s low of 2.05% on September 7 to 2.39% on Friday (Fig. 7). That’s largely on anticipation that Stanford University Professor John Taylor is leading the pack of candidates for the Fed’s top job. He is deemed to be more hawkish than some of the other ones under consideration. This might be why he won’t get the job after all. In any event, the prospect of higher bond yields has been a big positive for the Financials, much more so than it has been a negative for the other sectors.

The WSJ quoted President Trump late last week on this subject as follows: “Most people are saying it’s down to two: Mr. Taylor, Mr. Powell. I also met with Janet Yellen, who I like a lot. I really like her a lot. So, I have three people I’m looking at, and there are a couple of others.” Federal Reserve Governor Jerome Powell is widely viewed as a clone for Yellen on monetary policy.

(4) Trump card. Also driving the market higher recently are rising expectations that there will be tax reform by early next year that will include a cut in the corporate tax rate. On Thursday, the Senate passed a budget resolution that may expedite tax legislation. The budget proposal includes $1.5 trillion in tax reductions over the next 10 years. It might be possible to pass it with a simple 51-vote majority in the Senate, without a conference committee with the House of Representatives.

(5) The four phases. While we are all singing Sinatra’s happy go-lucky song, let’s not forget the always relevant observation of Sir John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

American Demographics: Slicing & Dicing. Every now and then, Melissa and I like to update our analysis of demographic trends in the US. These trends change slowly, but they do change, and they certainly do have an impact on the economy. The obvious conclusion is that the profile of American households has changed dramatically since the 1950s. Let’s review some of the more important trends focusing on the characteristics of total households:

(1) Families and nonfamilies. Family households as a percentage of total households has declined from 89.4% during 1947 to 65.3% during 2016 (Fig. 8). The percentage of nonfamily households has increased from 10.6% to 34.7% over this same period. These trends reflect that Americans are living longer, so there are more seniors who live in nonfamily arrangements. Millennials are staying single longer than previous generations.

(2) Married couples. Married couples as a percentage of total households has fallen from 78.3% during 1947 to 47.9% during 2016 (Fig. 9). Over the same period, all other (households excluding married couples) rose from 21.7% to 52.1%.

The percentage of family households with a father only or mother only has increased from 11.1% to 17.4% (Fig. 10).

(3) Children. Most of the drop in the percentage of households that are families has been attributable to families with children. The percentage of families with children has declined 46.7% to 27.6% of total households from 1950 through 2016 (Fig. 11). Married couples with children as a percentage of total households has fallen from 43.2% to 18.9% over this same period (Fig. 12). The percentage of other families with children has risen from 3.4% to 8.7%. The percentage of married-couple households without children has been relatively flat around 30% since the 1950s (Fig. 13).

(4) Average size. The percentage of households with only one person has increased from 13.1% during 1960 to 28.1% during 2016 (Fig. 14). The percentage with two persons rose from 27.8% to 34.0% over this period. The percentage with three or more persons dropped from 59.1% to 37.9%.

There was a big drop in the average number of children per family from about 2.3 in the early 1970s to about 1.8 in the late 1980s. It’s been ranging between 1.8-1.9 since then (Fig. 15).

The conclusion is that in the decades since the 1950s, the profile of the average American household has changed dramatically. At the start of the 1950s, families accounted for 90% of all households, with close to 80% of all households having married couples. Today, families are down to 65% of households and married couples are down to 48% of households.

Children have been going out of fashion. Families with them dropped from 47% to 28% of all households since the early 1950s. Married couples with children fell from about 43% to 19%.

Smaller households, fewer kids, and fewer married couples: That’s the profile of Americans today. Most of these trends can be explained by the rising percentage of the working-age population that is single, which has increased from 38% at the start of the data during 1976 to about 50% since 2013.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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Investors to Bull Market: Fly Us to the Moon
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2017-26-23
Monday, 23 October 2017 10:26 AM
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