Calculating the effect of the QE taper on S&P valuations

[ericoleman]

Tim. Thanks for sharing this and your other work.

You mention "normal" circumstances, and I am wondering if your view is that the economy drives the stock market or if changes in the stock market drive the economy? It is something I've been thinking about lately. Also, I took a look at the historical unemployment rate going back to 1950. It seems that once things are booming and unemployment is low is the time to be selling. It was 3.8% in March 2000, not a good time for investors.

Could changes in US fiscal and/or economic policy change your model's outcomes?

I'm trying to get a better grip on economics, but it is a bit tedious.

Thanks again.

[Timothy Clontz]

You're right that the economy mean reverts.

What I was trying to say is that the economy itself is driven by the ratio of working age / non-working age people in the population.

People who don't work consume more wealth than they produce. People who do work produce more wealth than they consume. That works at the household level, and also at the national level.

The key demographic for employment is the 35-55 year old range (not mentioned in this last post, but mentioned in an earlier one). People younger than 35 can take risks, but have no capital. People older than 55 have capital, but can't take risks. There are exceptions -- but the rule of thumb is that in order to START a business you need both capital and risk taking. Most small businesses (and most jobs created by them) are started by people in the 35-55 year old range.

THIS, I think, is what drives the economy.

[ericoleman]

Thanks Tim. Appreciate your reply, and thanks for sharing your work, too.