Since the 1970s, GDP has been in a downward trajectory. GDP of 2%-3% growth is probably another peak in that longer term trend. We worry that if the Fed emptied out all they could and didn't drive a pickup, fiscal policy could meet the same ends. We think the main factor is demographics which hits a low next year. Until then we think there is a downward bias to markets (NYSEARCA:SPY) this year. But we love 2018.
GDP And Markets Go Together
Source: St Louis Fed. Line By Elazar
The chart above compares annual GDP in blue versus the markets in green. The downtrending line we drew hits the tops of the GDP trend.
We currently sit at the upper end of a long term downtrend channel for GDP. Pretty much every year that GDP showed a dip markets also went down.
If correct and GDP holds to this pattern, then markets have risk.
What Makes Us Think GDP Should Continue This Pattern?
Monetary Policy and Demographics
The world has been shocked that record amounts of central bank stimulus did not drive the economic growth much higher.
That means there is something underlying the economy that did not allow the economy to respond. Many in the Fed have come to the recent conclusion that it was due to a lack of fiscal spending.
We think however that record low interest rates could have sparked some investment if there was any investment potential to be found. There was not. We don't blame fiscal policy.
50-year-olds are the heart of the economy. They are peak earners and peak spenders. There happens to be a major multi-year low in this age group in 2018. Markets have proven to bottom ahead of a major low. We expect the GDP peak to line up with this demographic trend to add resistance to growth this year.
We've shown this chart before, but now that we are actually in 2017 we think it matters more.
Source: Calculatedriskblog. Dates by Elazar
The red line is births by year. We took births and added 50 to them to come to our dates on the chart.
Above the red line are birth (plus 50 years) peaks. Below the line are birth (plus 50 years) troughs. Here are those peaks and troughs versus the Dow (NYSEARCA:DIA).
Source: Chart By Macrotrends. Dates By Elazar
Again, we wrote peaks above the line and troughs below the line.
Markets were affected by demographics. That relationship is mostly because demographics push around GDP, which we showed above correlates to markets.
Fiscal Policy At Full Employment
To drive more growth, you probably need more people working who get paid more. The jobs market though is at full employment. When considering demographics above, we have more people coming out of the workforce: the boomers.
That has made it difficult since 2008 to drive GDP even with mounds of quantitative easing and record low rates. If you look at our first demographic chart (above) that peak in 50-year-olds has been a drag on GDP ever since 2007.
We can now understand why even with mounds of monetary ease GDP has not done as well as expected.
Let's turn to fiscal policy.
Fiscal policy now runs into this same problem.
People are the economy. The understanding of the dynamics within the population is obviously important. If we are about to hit a low of spenders and earners, we have a major headwind year over year. We also have a major headwind of number of employed.
Fiscal policy can't change that.
Just as monetary policy was "pushing on a string," early on anyway, fiscal policy could also have a tough time.
We Love Stocks 2018-2020
We are not perma-bears. We love stocks in 2018
2018 is the low in births plus 50 years. Markets should anticipate the low in 2017 and start to move back up in 2018.
Then from 2018 to 2020 we have nice running room.
PE Trump Reelected 2020
While 2017 may be tough, this works out great for President Elect Donald Trump.
He will likely see economic headwinds to fiscal policy this year. As much as he tries, it may not drive much growth. Thereafter, though, he probably will see the wind at his back where demographics, monetary policy and fiscal policy coincide to help him get re-elected.
We didn't even start these four years, but if demographics say anything and the economy matters for votes, PE Trump gets re-elected, all else equal.
That's an economic statement, not a political one.
But Elazar Markets Have Hit New Highs Even With Your Demographic Story
Fair point. The mounds of historic, never-ever been done before bond buying by the Fed, ECB and BOJ probably had a little something to do with that.
Now the Fed is talking about reversing that huge position to stop buying those bonds. They are also in the process of raising rates.
As inflation continues to pick up we expect the Fed to turn more hawkish. The same holds true for global central banks.
Until we see 2% inflation, central banks are not rushing to tighten. But once inflation globally passes 2%, we'd expect the decade of stimulus to reverse. That stimulus supported markets despite the demographics.
When central bankers reverse their historic easy position, markets will likely better reflect these demographic peaks and troughs.
Expect slow GDP this year no matter how much fiscal policy there is. 2018 though could start bottoming and turning up. That bottom should get predicted with a market low in 2017 and higher stocks in 2018. We love stocks in 2018.
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