How Long Can The Rally Last?

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by: Thomas Hughes

Summary

The question of the ages, how long will the rally last?

Based on demographics it looks like a long time.

Labor market indicators concur, we can expect several more years of bull market conditions, at least.

Buy the dips.

The question of the ages, just how long will the bull market last. Based on demographics and labor market conditions it looks like a long time. I'm not saying that there won't be periods of consolidation, pull-backs from high levels and even a full blown correction or two because there will be. What I'm saying is that those times will be buyable dips for savvy investors.

Fundamentally, there is really no place for the market to go but up. The basic definition of a bull market is when buyers outnumber sellers. The way demographics are lining up with the age of the labor force, and the way labor market conditions continue to improve, the strength of retirement savings over the next decade at least will far outweigh the strength of retirement selling.

The Market, From A Generational Perspective

The evidence is plain to see. We've know for a long, long time that the Baby Boomers were a large generation, far larger than Generation X, and that is one of several fundamental reasons why we experienced a secular bear market between the years 2001 and 2010. As a generation the Boomers began to turn 55 in the year 2000 and as they approached retirement age began to turn from retirement saving and stock purchases to retirement selling and liquidation of risky assets. The generation behind them, Generation X, was far smaller and less inclined to save making them a weak market to sell in to.

  • Traditionally younger savers are more heavily invested in stocks and risk-on assets while older savers reduce those positions in favor of fixed income and lower risk alternatives.

I do not think it coincidental that the first wave of generational selling began with the peak of the Tech Bubble. It was an opportune time to sell for those with retirement in mind. The second wave began at the height of the Housing Bubble and onset of the Global Financial Crisis, another opportune time and notably, the point at which half the Boomers were at least 55 years old.

Now, bringing it forward a bit, in relation to Generation X and the Millennials, around the time of the beginnings of the current secular bull market in 2010, the first Gen X'rs are turning 45, the first Millennials 25, and the tides of the secular market are turning.

S&P 500 (SPX, SPY), Monthly

Fast forward again to 2017 and the youngest of the Baby Boomers are at least 52 years old, the oldest 72, and largely out of the work force. There is still some generational selling to come but as a group the bulk is over. What that leaves us with is Gen X, a generation fully engaged with the work force, and the Millennials, the largest generation in US history and one that is becoming more and more engaged with the work force.

source; BLS

Together, Gen X and the Millennials make up about 45% of the total population and, as a group, are still firmly engaged with retirement savings, not selling, making them a formidable bullish force. Together, they overpower the Baby Boomers who alone are only about 26% of population, and less engaged than ever with retirement savings.

Since the first of the Millennials are turning 32 they can be expected, as a generation, to work and save for retirement for at least another 20 years before the need to begin positioning for retirement.

Labor Market Conditions Fueling Retirement Savings

Labor market conditions are fueling the secular market as well. While the demographic picture is altering the job market is strengthening which means that not only are there more workers saving, there are working more, making more and saving more in terms of those IRA's and 401K's.

The Labor Market Conditions Index put forth by the Kansas City Federal Reserve is my favorite of the labor market indicators. It is a diffusion index of 24 labor market indicators used by the Fed and has been signaling a robust expansion of economic activity for nearly 18 months. . . but no one seems to be talking about it except me.

source; Kansas City Federal Reserve

The index hit an historic low shortly after the Global Financial Crisis and has been in steady recovery since then. Late in 2015 it crossed above the 0 line for the first time since late 2008, an event that has preceded the past two major bull markets. The most recent was in the early 2000's, just before the onset of the Housing Boom, the time prior to that in the early 1990's just before the start of the DotCom Boom. Based on historical evidence we can expect to see economic growth in the range of 2% to 5% over the next 4 to 10 years.

The most recent read on the LMCI reconfirms this signal, having advanced to a new almost 10 year high. The Activity Index gained 0.12% to hit 0.4% and has nearly doubled in the last 6 months. It is being driven by plans to hire, the number of businesses with jobs they can't fill, employee confidence and declining unemployment. The Momentum Index held steady just below the historic high, also driven on employee confidence as well as improvement to the labor force participation rate and 44 years lows in first time claims for unemployment.

My Conclusion

Based on the evidence at hand I conclude that we can expect to see secular bull market conditions for several more years at least. The demographic story has about 18 years to run while the LMCI indicating another 3 to 8.

This outlook coincides with the expected range of time a secular bull market can last, about 15 to 25 years, assuming the Haines Bottom of 2009 was the start of this one.

With all this in mind I predict we can expect to see the bull market last at least another 10 years with a chance of lasting longer. There will be corrections, there will be pull backs and there will be times of range bound consolidation but those dips will be buying opportunities.

Disclosure: I am/we are long SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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