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Second-Longest Bull Market Ever, Yet Investors Remain Skittish

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

April 26, 2016

IN THIS ISSUE:

1. 45% of Americans Now Pay No Federal Income Taxes

2. US Stock Market on Track For Second-Longest Bull Run

3. Despite Long Bull Run, Investors Continue to Unload Stocks

4. Millions of Americans Have Fallen Out of Love With Stocks

Overview

If the US stock markets don’t collapse between now and Friday, this will be the second-longest bull market on record. Really. The current bull market began in March 2009 and will have lasted for 2,608 days (7.2 years) on Friday. If so, it will top the former second-longest bull market which ran from 1949 to 1956 (2,607 days). That’s quite impressive.

Yet despite the stock market’s very impressive returns since the end of the Great Recession, American investors have unloaded stocks at a near-record pace. According to a new Gallup poll, only just over half of American households say they currently have any money invested in the stock market, matching the lowest ownership rate in the poll’s 19-year history.

The latest Gallup poll found that only 52% of American households have any money invested in stocks (individual stocks, equity mutual funds, ETFs, etc.), down from a high of 65% in late 2007. Unfortunately, young people are the ones with the lowest investment in stocks. There’s a lot to talk about on this subject.

Yet before we get to that discussion, I want to bring to your attention a new report which found that almost half (45%) of Americans now pay zero in federal income taxes, according to the Tax Policy Center. The reasons may surprise you. Let’s get started.

45% of Americans Pay No Federal Income Taxes

Many Americans don’t have to worry about giving Uncle Sam part of their hard-earned cash for their income taxes this year. An estimated 45.3% of American households, or roughly 77.5 million, will have paid no federal individual income tax, according to data for the 2015 tax year from the Tax Policy Center, a nonpartisan Washington-based research group.

Roughly half of those pay no federal income tax because they have no taxable income, and the other roughly half get enough tax breaks to erase their tax liability, according to the Tax Policy Center.

45% of Americans pay no federal income tax

While the mainstream media would have us believe that “rich people” pay little in the way of income taxes, this is simply not true. The top 1% of taxpayers pay a higher effective income-tax rate than any other group – around 23% on average, according to a report released by the Tax Policy Center in 2014 – nearly seven times higher than those in the bottom 50%.

On average, those in the bottom 40% of the income spectrum end up getting money from the government in the way of subsidies. Meanwhile, the richest 20% of Americans, by far, pay the most in income taxes, forking over nearly 87% of all the federal individual income tax collected by Uncle Sam.

The top 1% of American income earners is defined as those who earn over $400,000 a year. This group paid apprx. 45.7% of all federal income taxes collected for 2014 according to the Tax Policy Center. That’s almost half! Among the top 0.1% – just 115,000 households – paid more than 20% of all federal income tax collected that year.

When it comes to ALL federal taxes – individual income, payroll, excise, corporate income and estate taxes – the distributions of who pays what is more spread out. This is partially because nearly everyone pays excise taxes, which includes taxes on gasoline, alcohol and cigarettes.

Rich people pay 69% of all federal taxes in America

I could go on and on with this discussion, especially in light of the liberals’ obsession with “income inequality” and raising taxes on the “rich,” but I will leave it there for today, so we can get on to our main topic.

US Stock Market on Track For Second-Longest Bull Run

Assuming the US stock markets don’t collapse in the next three trading days, the current bull market will become the second-longest in history on Friday. From the March 2009 low, the S&P 500 will have risen overall for 2,608 days by the close on Friday.

The chart below shows the S&P 500 through last Friday when the bull run was at 2,603 days. If the current uptrending market makes it through this Friday, that will surpass the former second-longest bull run in the post-WWII era, which was from June 1949 to August 1956, or 2,607 days (see below).

S&P 500 bull markets in calendar days

The longest running bull market was from 1987 to 2000, when the dot-com bubble burst. That bull market lasted 4,494 days. For the current bull market to last that long, we will have to avoid a bear market until June 2021. I don’t know about you, but I don’t think we’ll make it!

The longevity of the current bull run is surprising to many, especially as questions intensify about the health of corporate profits so far this year. Corporate profits for S&P 500 companies are expected to fall 7% on average in 2016, according to a recent survey by Thomsom Reuters.

In Europe the earnings decline so far this year is predicted to have been greater, with 2016 corporate profits expected to drop 19% from the year before, according to Thomson Reuters. Excluding energy companies, which are hurting the most, a 12% decline is forecast for Europe.

Yet despite the decline in corporate profits so far this year, the US stock markets are currently near new all-time highs and imply a future of rosy profits and economic optimism. Yet at the same time government bonds are priced for a world of stagnant growth, diminished opportunities and minimal inflation.  

Put differently, stocks and government bonds don’t often move in parallel directions for long periods of time. Yet both stocks and bonds have been trending higher since the S&P 500 low in March 2009. Keep in mind that bond prices move higher as the yield moves lower.

S&P 500 (Nearest Futures)

30-Year Treasury Bond Yield

Most analysts attribute the significant drop in Treasury yields in recent years to unprecedented government bond purchases by central banks around the world, also known as “Quantitative Easing” which continues in Europe, Japan and elsewhere.

In addition, the Fed’s cautious approach toward raising interest rates in the face of global economic uncertainty has led investors to seek out the safety of government bonds, pushing the yield on benchmark 10-year Treasury notes down 40 basis-points this year to 1.88%, just 50 basis-points shy of the all-time low reached in mid-2012.

Major government bond markets around the world have followed the same trajectory, with German 10-year bond yields trading at only 20 basis-points above zero and Japanese bonds with maturities up to 12 years trading at a negative yield as of last week.

As a reminder, the Fed Open Market Committee is meeting today and tomorrow and will release its latest policy statement after the conclusion of the meeting. Most Fed watchers do not expect an interest rate hike at this meeting.

Despite Long Bull Run, Investors Continue  to Unload Stocks

The Dow Jones Industrials and the S&P 500 Indexes may be hurtling toward record highs, but the American people, whose love affair with stocks has understandably waned since the Great Recession, look to be more hesitant than ever to buy into the rally.

It’s been a volatile year for equities, but while the major indexes are close to record highs, the percentage of Americans invested in the stock market is at a record low. According to a new Gallup poll, only 52% of American households say they currently have any money invested in the stock market, matching the lowest ownership rate in the poll’s 19-year history. Here you go:

Percentage of US Adults Invested in the Stock Market

In 2007, just before the markets were crushed by the collapse of the housing market, stock ownership by Americans hit a record high of 65%. Stocks have recovered nicely since then and are approaching new highs, but millions of investors have missed the strong recovery since early 2009.

Stock ownership by Americans fell every year since 2007, until 2014 and 2015 when it ticked marginally higher. Yet stock ownership remains near a record low.

Drilling into the numbers reveals that middle-class Americans are the most skittish when it comes to the stock market. Almost three out of four of those with incomes ranging from $30,000 to $74,999 said they invested money in stocks in 2007. That number has dropped to half, which is a much more severe decline than in the other income brackets.

Americans Invested

The numbers on how much money Americans have yanked out of the stock markets in recent years are shocking. Since peaking in 2007, US households have shrunk their holdings of stocks, mutual funds and equity ETFs (exchange traded funds) by a record 18.6% or over $2 trillion in total.

This has been the largest equity liquidation in history and well surpasses the 10% liquidation during the decade from 1979 to 1989. The largest decline has been in direct individual ownership of stocks, which interestingly has occurred just as US corporations have been buying back their own stock from households in record numbers over the last several years.

Millions of Americans Have Fallen Out of Love With Stocks

Since the end of the financial crisis in late-2008/early-2009, individuals have invested nearly nothing in the stock markets in the aggregate. Millions of individual investors are suffering from a crisis of confidence having endured two major bear markets (2000-2001 and 2008-2009) in less than a decade.  And they may not return to the equity markets anytime soon, if ever.

Something similar happened in the wake of the Great Depression. It took over a decade of incredibly high dividend yields to bring Americans back to the stock market. Many believe the same is true today in the wake of the 2008-2009 financial crisis which saw the S&P 500 Index plunge by over 50% at the worst point.

As noted in the table above, younger Americans are the most likely to have exited the stock markets. By age, Americans under age 35 are the most likely to have fled the market. The percentage of young people with money in stocks has fallen 14 points since 2007, to only 38%.

Most financial planners and investment advisors believe that young adults need to invest in the stock market early-on in order to capture the growth necessary to pay for retirement. They argue that the long time horizon young investors have provides them an opportunity to make up for any losses in the short-term.

A recent Gallup poll found that only just over a fifth (22%) of Americans believe that the stock market is the best long-term investment, compared to more than a third who think real estate is the best long-term investment. This is shocking!

Americans' Choice of Best Long-Term Investment

Yet the fact is that since 1980, the stock market as measured by the S&P 500 Index, has appreciated more than four times the average home price increase in the 10 largest metropolitan cities in the US, according to Forbes.

The Bottom Line: Barring a huge surprise between now and this Friday, we will be in the second-longest bull market in history. Yet stock ownership by Americans is near the all-time record low, with over $2 trillion in shares liquidated since the peak ownership in late 2007. Something is very wrong with this picture.

In 2007 when the stock markets peaked, 65% of Americans owned stocks in one form or another. Yet today, that number has fallen to only 52% according to the latest Gallup poll. Despite the fact that the major stock indexes are near their all-time highs, millions of Americans have been on the sidelines since 2008-2009.

If this hits close to home, we have solutions at Halbert Wealth Management. Don’t hesitate to let us help you. Call us at 800-348-3601 and have one of our non-commissioned Investment Consultants review your current portfolio and recommend changes to help you reach your financial goals.

Wishing you investment success,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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