Something a little different today. I have five reasons I’m still bullish on the American Equity market.
The first reason, and it is a big one, is demographics. Historically, when the 35-49 age group becomes larger than the 20-34 bracket, good things happen in the US. Academics call this the MY (middle aged to young) ratio. Basically, the 35-49 bracket represents the peak earning, and peak spending years, of the middle class and lower class. Corporate profits soar as a result. We entered this MY period in 2015 and will stay there until 2028. Average GDP growth will have a strong tailwind this entire time.
The second reason is the recent advances in unconventional drilling. The US has become the number one producer of hydrocarbons again. The price of fuel, and other products, are falling as a result. This is going to provide a long term competitive advantage to the US and Canada. And we are only getting started. There are new theories bearing fruit in the Gulf of Mexico, leases off the coast of Florida in deepwater are becoming available for the first time, leases off the coast of Mexico will increasingly be opened to American companies, Atlantic seaboard drilling will soon be a reality, and we are finding new non-shale conventional deposits in America again thanks to advances in seismic technology. All of this improves the US balance of trade, builds a domestic energy, and provides a price and security advantage to domestic users of hydrocarbons.
The third reason is the general pace of technological advancement. We have “iEverything” now. There is an arms race brewing in additive manufacturing. Robotics technology is moving forward rapidly. “Smart” software is becoming a reality. And we are on the cusp of the “internet of things.” Soon your refrigerator will automatically order fresh milk delivered when you are running low. Many things will become more convenient and more efficient. And American companies will reap most of the rewards.
The fourth reason is the Shiller P/E or CAPE. There is a lot of ink being spilled lately that the 10-year CAPE signals we are near a top. Thing is, Shiller never said 10 years was a magical time period to view the cycle through. Because we recently had a once a century economic event in 2008, I think the 5 year CAPE is more relevant. And it shows stocks are just now approaching fairly valued on a long term historical basis. We are a long way from nosebleed territory. And nosebleed territory is where we are heading thanks to the five reasons I am detailing today.
The last reason is interest rates. Interest rates have been ridonkulously low since the crisis. Doom and gloomers ar terrified that as soon as the Fed lifts the rate from zero to “zero plus almost nothing” its going to be like the punch bowl has been taken away. The Lizard King disagrees. Historically, when interest rates are already high and the Fed raises them higher, that tends to lead to a slowdown. But when rates are low (especially super low?) Well, then the good times keep rolling. It is a signal that the economic situation is improving rather than that the party is over. And these big companies can still engineer a lot of stock buybacks at sub 4% rates. We are a long way from an interest rate apocalypse.
Devour your prey, raptors!