Here’s an a long term indicator that I stumbled on that has been able to time the stock market’s generational buy points very well. It is a ratio of discretionary spending to total US consumer spending.
Click to see larger graph in new window:
Every time that the US Consumer rediscovers frugality and retrenches by spending less on the non-essentials, the stock market makes a major bottom.
In the early 1960’s discretionary spending as a percentage of the total budget went below 17%. We then had the roaring market powered by the “nifty fifty”.
In the early 1980’s again discretionary spending went below 17%, reaching a slightly lower level. And again, we saw the birth of the 80’s “go go” bull market that was rudely interrupted by Black Monday in October 1987.
In the early 1990’s discretionary spending once again breached 17% and once again the market made a low (in late 1990) that would go uninterrupted until the LTCM crisis in the summer of 1998 and top out in 2000 at the height of the tech bubble.
Which brings us to the most recent - and seemingly the most depressive state of the US consumer. Belt tightening is so rampant that discretionary spending is at an all time low for at least 50 years. No wonder we are constantly hearing today’s economic situation compared to the Great Depression.
But if the previous dark times are any indication, the stock market is poised for a shocking come back.
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