Don't Let the Market Scare You Out of the Next Move Higher

After several weeks of tumbling share prices, bullish sentiment is in woefully short supply.

So for today’s video, I wanted to hit pause — and take a closer look at the actual mechanics of the market.

But I want to warn you in advance:

Once you realize how the stock market works these days, you’re probably going to turn into a perma-bull yourself…

Let’s roll the video:

Video transcript:

Welcome to Moneyball Economics. I’m Andrew Zatlin.

Given all the turmoil in the markets, I’ve been repeatedly asked, why am I such a perma-bull?

I’m out there saying, “No, no, no, don’t worry. Buy these dips! Don’t let this wall of worry bring you down. The market’s going to be going up” Now, I say that as an economist. I say that because I’m a numbers guy, because when I look at what’s going on in the stock market, I’m only feeling positive.

Oh, in the short term, there’s going to be gyrations, but I’d like to share with you why you need to understand the permanent bullishness of the stock market. You’ve seen it.

You’ve seen how it always seems to go up, but maybe you haven’t understood why. And it has to do with the mechanics of the fact that the stock market is a market. There are buyers and sellers, except when it comes to the stock market…

There are more buyers, there’s more of a buying impulse, and when you’ve got more buyers than sellers, prices go up. It all started back in the 1980s under Ronald Reagan, until Reagan, if you wanted to have a retirement plan, you turn to your employer and your employer would basically create a pension fund or something similar. In the 1970s and early eighties, only 15% of households had direct exposure to the stock market. But in the eighties, that suddenly changed by 1990, 30%.

That 15% rocketed up in just a few years to 30%. Within another 10 years, it rocketed up in 2000 to 50%. Today, 62% of households have direct exposure to the stock market via the 401k and some pension funds. What happened? What’s up with this 401k? You come into the 1980s and suddenly employers have discovered this thing called the 401k, and that’s an employee funded instrument.

Employers say, we can shift the burden of long-term retirement savings plans to employees. If we use this 401k and the IRS, they go along with it. You can deduct as an employee any amount of money you put into your 401k from your income. So it’s a win-win-win.

Even better, to make it happen a little bit more smoothly, employers kick in some matching funds. In essence, individuals are now able to pump money into the stock market, boom, off to the races, all this money flowing in. And remember, for every dollar that goes into the stock market, the world of Wall Street’s able to create $10. So you put in a billion. Wall Street finds a way to make that worth 10 billion through margin and leverage, and that buys even more stock over time.

Today, we have $5 trillion in pension funds in the stock market, but we have 25 trillion coming from 401Ks.

This has been a major vehicle of buying stock market, and so as a result, you’ve got $30 trillion that’s just sitting there that owns the stock market.

Now, coincidentally, the S&P 500 is worth almost $50 trillion.

In essence, there’s a permanent backstop because the bulk of the stock market ownership is being held in basically a passive investing type of framework where individuals put money to the 401k, and it’s not a question of them cashing out, “oh my gosh, let me take my money out.” It’s more, “well, let me rebalance my portfolio.” Maybe I want a little bit more high tech. Maybe I want a little bit more industrial, whatever. But the money is still sitting there and that money is buying the stock market.

So it’s backstopping $30 trillion of roughly $50 trillion of the S&P 500 is just sitting there. Now, you add Wall Street leverage to it, and man, there’s constantly more buyers out there.

But here’s the second part of this equation…

It’s not just the money that’s been contributed to date. It’s that every year, another half trillion dollars comes in from pension funds and from 401Ks, and so you have additional incremental buying pressure. Last year, this time, the S&P 500 was worth about $40 trillion.

Today it’s worth about $50 trillion, $10 trillion expansion.

At the same time, another half trillion dollars was contributed. So basically, remember that formula I shared with you a minute ago, how every dollar that goes into Wall Street directly gets transformed into $10 via the magic of leverage. It’s actually a little bit more.

That half trillion dollars going in suddenly creating $10 trillion of wealth (Wall Street is on a 20 to one ratio, and that’s really the leverage that’s used out there. It’s 20 to one, not 10 to one.) But regardless, the mechanisms are in place for there’s a permanent backstop.

The market will not go below a certain level simply because people don’t really sell their 401Ks. They’re just sitting there. They don’t know they can cash out.

At the same time, more money’s constantly just coming in, and Wall Street has a way of turning the crank and the market’s going to permanently go up. So when the market gets to a blow off period, for example, the recent 10%, that’s it.

Game over? It’s not game over! It’s pullback time, but eventually there’s more money coming in every month, and so that money has to go somewhere. There’s always buying pressure.

And right now we’re an interesting place where the selling pressure is done. And people might say, well, when does the market surge again?

Guess what? Every month, every month, we’re getting roughly $40 billion coming in, which equates to $400 billion, $800 billion. When Wall Street gets done with it, that is every month a permanent 2% move.

Think about that.

Every month the market has pressure to go up roughly 2% simply because you’re putting money into your 401k. It’s a beautiful situation. The markets permanently go up. Oh, there’ll be pullbacks, but this is why we have a bullish stock market. At times it will overstretch.

So fine, you sell the rip at times it gets oversold. You buy the dip. But know this, the market is permanently bullish until it isn’t and it isn’t. When we get to an economic collapse, and that seems to be what Trump is kind of sort of triggering, there’s a lot of worry out there.

But again, it’s not going to go down too far because again, that money’s just sitting there. And by the time people start wondering, should they cash out, the market has a bottom and it starts moving up again, you should be bullish.

Especially because while the near-term Trump is creating disruption long-term, he is essentially creating a golden age for business and for the United States.

We are in it to win it. Zatlin out.