Meme stock mania has died down this week. Only one force is powerful enough to take the attention away: Federal Reserve Chairman Jerome Powell. And all eyes will be on the Federal Open Market Committee meeting that concludes this afternoon.

Investors will pore over every written and spoken sentence to divine any changes in policy. Because any perceived change in the Fed’s stance can mobilize trillions of dollars across stock and bond markets.

It all boils down to the Fed’s stranglehold on the business cycle. Whether through short-term interest rates or money printing to purchase bonds, the Fed can increase or decrease the speed of the economy at will.

But the Fed is not all-powerful. There are also larger structural forces at play, which are beyond the Fed’s control. While business cycles are measured in years, there are bigger cycles that are measured in decades. Knowing how they work can turbocharge your gains in the stock market.

That’s why, if you’re only focusing on the Fed and the business cycle, you’re missing the big picture and could be giving away your chance at bigger profits.

This Is More Important Than the Business Cycle

The business cycle deals with the periodic expansions and recessions in the economy. You’re probably familiar with the four main phases: troughs, expansions, peaks and contractions.

That’s why investors are fine-tuned to tracking things such as unemployment, retail sales and inflation. They want to know our place in the cycle to get an edge on the stock market’s next move.

But here’s the thing: The business cycle plays second fiddle to a much larger force.

You see, business cycles occur within larger-degree secular cycles. These are long-term periods during which the economy is either booming or going bust. Ted just wrote about how these powerful secular trends show up in the stock market.

Here’s what drives secular cycles in the economy.

Leverage the Balance Sheet Boom

Debt levels are critical to understanding secular economic and stock market movements.

When debt levels are low, companies or consumers can use leverage to bid up asset prices. That creates a feedback loop that can last over long periods. Rising prices enable the use of more leverage, and the cycle continues.

Those forces can also work in reverse, like what we saw with the housing market during the financial crisis.

That’s why you should track the ability of the private sector to take on more debt to understand the secular cycle.

Right now, households in particular are in great shape. Since the pandemic, over $5 trillion in stimulus and reduced consumer spending means that personal savings rates are hovering at 46-year highs.

And income sent toward debt service has plunged to the lowest levels on record over the past year. Just take a look at the chart below.

 household debt payments chart 2021

(Click here to view larger image.)

Here’s what that all means: While debt at the government level has gone through the roof, households have a remarkable ability to take on leverage and bid up all sorts of asset prices. Directly or indirectly, that will show up in stock prices as well.

So, despite the wall of worry that the stock market has climbed so far this year, there is still a much higher peak in the years to come.

In fact, Ted believes the stock market could climb more in the next 10 years than it has over the last 100 years … even though we’re testing new highs regularly and valuations are out of this world. Ted will explain why in more detail next week. Look out for that.

Best regards,

Clint Lee
Research Analyst, The Bauman Letter