This week's video reviews facts to help us assess the probability of good things happening relative to the probability of bad things happening.
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Demographics Playing Big Role In Markets
Power Of The Millennials
Markets ultimately price all assets based on the simple law of supply and demand. Demographics play a large role on the demand side of the equation. From The Wall Street Journal:
The U.S. homeownership rate rose in 2017 for the first time in 13 years, driven by young buyers who overcame rising prices, tight supply and strict lending conditions to purchase their first homes.
This time, what’s driving the market is a shift in favor of owning rather than renting coming from the largest homebuying generation since the baby boomers: millennials.
“There’s no government incentive program in sight that is having this effect,” said Susan Wachter, a professor of real estate and finance at the Wharton School at the University of Pennsylvania. “This is back to basics.”
Stocks, Baby Boomers, and Millennials
The baby boomers were 22-29 years old when a secular trend began in the stock market in 1982; the trend lasted 18 years. In 2017, the millennials were 13-35 years old. The demographics and chart patterns shown below tell us to keep an open mind about better than expected outcomes in the stock market over the next 5 to 20 years.
These concepts were covered in detail in a September 1, 2017 video. Since publishing the video, stocks and housing have both appreciated.
Is A 20% 1998-Like Plunge Coming In Stocks?
FACTS INSTEAD OF FEAR
When investors see red covering their screens, it can understandably be unnerving. Since many are comparing the recent move in stocks to the late 1990s (don't include us on that list), a fair question might be:
After moving up rapidly in 1998, the S&P 500 plunged over 20%. Is the present day market similar to the peak in 1998?
The chart below shows the four months leading up to the 1998 plunge (see orange box). Notice: (a) price was making a series of lower highs for almost three months below the red line, (b) the fastest moving average (blue) came down near the slowest moving average (black) in June 1998, which is indicative of a weakening stock market trend, (c) after the peak was made, the vulnerable trend allowed the blue moving average (MA) to drop rapidly toward the black moving average, eventually resulting in the blue MA moving from the top of the moving average cluster to the bottom, and (d) after that point, really bad things happened.
HOW DOES THE SAME CHART LOOK TODAY?
The answer to the question above is "much better". Instead of threatening to move to the bottom of the moving average cluster, the fastest moving average (blue) remains firmly on top, which is indicative of a strong bullish trend. Instead of price making a series of lower highs as it did below the red line in 1998, the S&P 500 has printed several new all-time highs over the last four months.
MORAL OF THE STORY
While anything can happen in the markets, the present day trend in the S&P 500 has a stronger and more sustainable look than the S&P 500 did before and after the peak in 1998. Strong trends, similar to the one we have in 2018, typically go on to print a new closing high after relatively shallow (2% to 6%) pullbacks.
The comments above are based on the facts we have in hand today. If the data deteriorates in a meaningful manner, we will classify the decline as "volatility to respect" and make any necessary defensive chess moves. Under our approach and based on our timeframe, that has not happened yet, and thus, the normal two-day pullback falls into the "volatility to ignore" category.
We will continue to take it day by day, monitoring the hard data with a flexible, unbiased, and open mind. If action needs to be taken, it will be taken.