Influences on Supply and Demand

In looking for basic long term Influences on supply and demand, we looked to what could influence investor expectation and anticipation for long periods of time. We discovered there were things and emotions that were influential. The things we thought were most influential were:

Taxes: Lower capital gains, dividend and income taxes give people more incentive to invest and they usually do. Higher tax rates tend to lower incentive which creates lower evaluations for investment values.

Interest rate amount and direction: Bonds compete with stocks. Interest rates have an equivalent price/earnings ratio by dividing the rate into 100. 5%=5/100 equates to a 20 p-e. 10% equates to a 10 p-e. The current low rates could allow for higher p-e ratios but they are also influenced by greed, fear and tax rates which can override mathematical relationships. Lower taxes and interest rates trends have lasted over 2 decades and have become the “norm”. The direction of both are likely to change in the next 2 years creating change.

Geopolitical, political and demographic trends: Trends that have been in effect to the benefit of the economy for the last 20 years are changing and are likely to force changes in expectations whether investors see them coming or not.

Long Term Greed Influence:
Markets tend to go from highly valued historically to quite under valued over time. Greed is very obvious at market tops while fear is obvious at market bottoms. Investors emotionally react to the trends (things) mentioned above. When trends stay in effect for many years, the activities that the emotions cause can get quite excessive as we have witnessed in the last few months and decade.

You can identify both greed and fear by what is going on in the economy and how stocks are valued. A few traits of greed are arrogance complacency and hope. Investors have been conditioned to hold stocks in expectation of higher prices. This is sometimes called a sellers strike. They are used to higher highs and higher lows.

The markets are valued at around 20 time earnings or higher and dividend yield of 3% or less. Speculative issues go up when the market goes down. There is high margin debt and leverage.

Long Term Fear Influence:
As the excesses of greed begin to correct, more investors, who were formally “greedy”, begin to get fearful. The transition starts when the excesses of speculation of the markets, business and politicians begins to unwind in the news. As bad news dominates the media, markets make new lows and stop making new highs. After awhile the Federal Reserve starts to lower interest rates to help the economy and the markets. Investors start to lose their arrogance and complacency of expecting higher prices.

Fear becomes more common and then the politicians pass programs to give incentives for people to spend. The thing most likely to cure fear is time to get the excess speculations corrected and get the economy and markets bases built for the nest up cycle. Fear is usually seen with pessimism and despair of the future. Buyers hesitate to buy sometimes called a buyer strike. This where bases are built. The market are likely to be 8 to 12 times earnings and a dividend yield of 4.5% or higher. New lows come after rallies. This usually lasts a few quarters. When you see fear ending, it is a time of great value and time buy for the long term.