First a quick note on yesterday’s stock market action. An indecisive day overall again, and on the lowest volume yet. The biotech breakdown remains tentative, but volume has been significantly higher on the down days versus the up days such as yesterday. Volume is also rapidly accelerating into BIS Ultrashort Biotech. For the wider US markets: put-call remains 5 months under 1, Skew remains 5 months historically elevated, Investors Intelligence % bears remains 5 months in the historic low band, and breadth divergences (% stocks above MA) have been running for 5 months too. With every day that passes, the likelihood of the elastic band snapping grows.
Now to the title of this post. Secular bull markets and superpeaks have always been driven by demographics. Simply, secular = demographic. If there is a swell in the middle-aged group that is the main buyer of equities, particularly if set against declines in the young dependents and in the old age disinvestors groups, then we have the recipe for an increasing flow of money into equities until the demographic trends reverse. Note that this applies to stable, developed, free market countries – a poor country run by a dictator but with a demographic tailwind will not experience the same results.
Japan’s secular bull market into 1989/1990 is explained by these two charts. A birth swell around 1950 makes for a swell in equities buyers into 1990, and from around 1950 through to 1990 there was a potent combination of a swelling middle-age group and a declining child dependent group. Thereafter the middle-age demographic trend reversed and the old-age group began to accelerate, making for a secular bear.
China’s Shanghai Composite superpeak appeared as its 4 demographic measures topped out, and now that stock market is currently threatening to break down even further, as all demographic measures are trending downward:
Source: Chris Kimble
The Dow secular bull and superpeak into 1929 was a result of record immigration of younger adults into the US at the start of the 1900s followed by restriction as of the 1920s, and that swell became the key middle-age group in the 1920s. Plus a decline in births in the 1920s reduced the child dependent ratio as the decade progressed.
The US stock market secular bull of 1980-2000 was the result of demographic measures trending upwards for that window of time, supplemented by similar rising demographic trends in Europe and China (and Japan in the 1980s), which added to the world boom. Thereafter US demographic measures turned down and the current downward pressure is supplemented by similar downtrends in China and Europe, the recipe for a global bust.
The secular bear market in stocks is still very much in play, and there should be a real lower low in global equities ahead. Gold behaves as the anti-demographic, making a secular peak into 1980 and beginning a secular bull in 2000 that by demographic trends should run on to the next solar maximum of the mid 2020s (solar maxima generate speculative peaks and there is a correlation between sunspot cycles and demographics).
Valuing country stock markets by PE or CAPE has to be considered relative to demographics. An expensive valuation is likely to become more expensive if demographic trends are upward, due to the increasing flows of new buyers. Hence, as the below chart shows, we saw the highest set of global CAPEs into 2000 due to the combined demographic uptrends of USA, Europe and China. Their combined current downtrends have produced a historically low set of overall CAPES.
The US stock market is currently the second most expensive in the world by CAPE, and above all other bands in the chart above. Relative to demographics, this is very much overvalued. As per the two charts just above this one, there is a compelling case for US and global equities to enter a new cyclical bear and continue the secular gradual washout following the 2000 superpeak, whilst gold should resume its secular bull as the anti-demographic.