Originally published on SeekingAlpha [https://seekingalpha.com/article/4115607-demographics-elephants-stock-market]

Market commentators propose plenty of reasons for why the S&P 500 continues to make new all-time highs. There are three basics concepts that get repeated in various forms. Each has a perspective on the market that is based on the facts and information they value:

  1. Bear: This bull market is ending now and should have ended years ago, except for those pesky central bankers providing free money (all that free money is going to hurt us in the long run via uncontrollable inflation).
  2. Neutral: The bull market has been going on for a long time and doesn't look to be ending, but with the Fed raising rates and the current geopolitical situation, a recession could be on the horizon (growth is good, but it can't last forever).
  3. Bull: This bull market will just keep going because innovation will keep driving markets higher, and current valuations are fully justified by low inflation and low interest rates (new technology will always make things better, so there's nothing to worry about).

It is surprising how many of these experts don't think about the underlying drivers of the markets. Money flows are what drive the market higher or lower. This is fairly clear in the short term, where stocks are driven by discretionary buyers and sellers. When lots of market participants want to buy a stock, the price goes up because the forced sellers (market makers) move their offer prices up due to the increased demand. The same thing happens in reverse when lots of sellers appear. The concept can be applied to markets as a whole, with the "stock" in question being index funds like the SPDR S&P 500 Trust ETF (SPY) or the iShares Core S&P 500 ETF (IVV).

In the long run, it's assumed that valuations become more important, and this is true to some extent. The famous quote from legendary value investor Benjamin Graham is as follows: "In the short run, the market is a voting machine. In the long run, it's a weighing machine." But how long before the weighing machine takes over? It might be that the voting machine can dominate on longer time scales as well.

Getting back to the bear versus bull perspective above, I can appreciate the theories that give importance to central bankers, because they can truly make money flow where they want it to flow. Of course, they have mandates to abide by, so they aren't always providing liquidity like they have been since 2008. Even when central banks are accommodating, their influence (at least in equity markets) is small when compared to something else that people don't talk about very much: demographics.

latest posts
January 24, 2023

2023 Economic Outlook

Given the past year’s volatility, we thought it might be helpful to post some insights on what happened over the course of 2022 and a look ahead at what to pay attention to in 2023.

Read This Article >
September 30, 2021

Equity Compensation and Its Tax Ramifications

Equity compensation is used by many types of employers. Most startups use equity compensation to reduce their burn rate while keeping their compensation competitive. As a company matures and cash compensation becomes less problematic, many companies continue to offer equity compensation to align their employees’ interests with those of the company.

Read This Article >
September 8, 2021

What are Restricted Stock Units and How Are They Taxed?

We continue to talk to more people who are compensated by their employers with Restricted Stock Units. This form of compensation allows companies to incentivize their employees by granting them ownership in the firm. This is known as equity compensation, which is provided alongside base salary, bonuses, and other benefits.

Read This Article >
Jason Draut, CFP®
516 El Cerrito Plaza
El Cerrito, CA 94530
Chris Sheehy, CFP®
180 7th Ave Suite 204
Santa Cruz, CA 95062
© 2020 HarborLight Investments