I am now of the mind that there is a complex interaction between demographics and solar cycles bringing about what is more commonly known as ‘secular’ bull and bear markets in equities. We need to understand the demographic trends of the main countries (those of major GDP, stock market capitalisation and population in the world), whether these are broadly trending together or divergent, and when the trends change. We also need to know when solar peaks fall, as demographic trends peaks that fall close to solar peaks are likely to be brought to an excitement maximum around the solar peak. We also know that solar cycles influence birth rates and thus demographics, adding to the complex interaction.
We know that stocks markets around the world largely move together, so I believe we need to pay particular attention to the demographic trends of the ‘giants’ as it is unlikely we can muster a global stocks bull if the collective trends in the giants are negative. To this end I have amalgamated USA, China, Japan, Germany and the UK into composites of middle-to-young, middle-to-old and net investor ratios, and projected them forward. I selected these five countries based on their GDP and stock market capitalisation dominance since 1950 to now. I then applied GDP/marketcap-appropriate weightings in creating demographic averages, with Germany and UK weighted 1 each, China and Japan 2 and USA 4. This is the result:
We see a clear collective downtrend in the demographic trio of measures from around 1965 to 1980. I believe that is the reason why we saw a broad global equities bear market for that period. We saw a clear collective uptrend in the trio of measures from around 1980 to 2005. I believe therefore there was a long equities bull in this period across most of the world. Within that long global bull market Japanese stocks topped in 1989 (solar peak) and US stocks topped in 2000 (solar peak), but the collective weighted demographic trend did not really change until around 2005, hence the MSCI world index registering a peak in 2007 rather than in 2000:
Because collective demographic trends then turned down from circa 2005 and are not projected to bottom for a few years yet, I suggest the current global rally in stocks is likely on borrowed time, and that there is the possibility of a global bear market in play from 2007 through to either around 2020 or 2025. There is a window of demographic respite from around 2025 to 2030, but then the three measures are united negative again from around 2030 to 2035.
I have broken down the three demographic measures below.
Net Investors is collectively in a downtrend from here onwards. However, Japan is good right now, and several of the countries enjoy an up move from around 2025 to 2030.
In summary, the current global stocks rally ought to come to an end as it is counter demographic trends, i.e. it is unlikely to be a new ‘secular’ bull market in progress. However, within that Japan has the demographic trends to justify such as bull market for itself, and its take-off in November 2012 was belated by demographics. Therefore I expect Japan can carve out more gains, but that the other major nations are more likely to tip over into a fresh equities bear in due course. As global markets tend to move together I don’t expect Japan can go its own separate way, but rather that it will outperform the others as markets move up and correct less than the others as markets move down.
Returning to the first chart above, there is the possibility of an overall global bear market in stocks lasting until circa 2025, which is likely to be the next solar peak (or thereabouts). If that were to occur then commodities could potentially only be at an intermittent peak currently, heading for a ‘secular’ peak around 2025’s solar peak. Food for thought.