Buy Stocks Until 2011, Then ….


Echoing the above clip from P.J. O’Rourke’s Eat the Rich, a new and downbeat paper on demographics and the U.S. stock market:

Despite theoretical ambiguities, U.S. equity values have been closely related to demographic trends in the past half century. There has been a tight correlation between population dependency ratios, such as the M/O ratio, and the P/E ratio of the U.S. stock market. In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values. Moreover, the demographic changes related to the retirement of the baby boom generation are well known. This suggests that market participants may anticipate that equities will perform poorly in the future, an expectation that can potentially depress current stock prices. In that sense, these demographic shifts may present headwinds today for the stock market’s recovery from the financial crisis.

via FRBSF Economic Letter: Boomer Retirement: Headwinds for U.S. Equity Markets? (2011-26, 8/22/2011).


  1. What about the idea of the boomer's heirs redeploying their inheritances into longer-dated investment vehicles, equities, from the preferred relatively shorter-dated vehicles, fixed income, that their parents held. Of course, assuming it stays on their balance sheet and is not spent in 6 months. I've not seen any mention of this as a potential phenomenon, but in light of this research, it seems a valid question/line of reasoning, no?

  2. Companies and hedge funds have enormous amounts of money available to invest. Just look at the bond market, drenched in liquidity. Even if individuals pulled back on equities, hedge funds, institutions, endowments, sovereigns and the companies themselves have the wherewithal to step up. The capitalization of the bond market is literally multiples of the worldwide stock markets.

    There are real demographic problems, but they are deeper than 401K moves by boomers. The deeper issues stem from low birth rates and low family formation across the developed world. This leads to a worldwide demand shortfall, as compared to past expectations. Beneath this is a values crisis where the richest generations in history are precisely the ones living in the moment and not forming families. What a mess!

  3. The U.S. has one of the strongest demographic profiles of the developed world, with the youngest of major economy any bar India. Compared to China, which in twenty years time will make Japan look sprightly, we are actually OK. But as other commentators have pointed out, the U.S. is an outlier, and particularly amongst the developed and nearly-developed major economies with slow or low family formation.

  4. Before the baby boomers head for the casket, they will head for the door and this will put significant downward pressure on the markets for the next 20 years. Baby boomers will have far less disposable income than they anticipated, whether it is by way of falling housing prices or portfolios. The good news is that this is a natural process, one can think of it as a form of wealth transfer, whereby assets become more affordable for the children of the baby boomers. How might one trade this thesis? What purchasing patterns shift?

  5. Don't forget reduced population growth leads to less need for expansion so more earnings will be devoted to buybacks and dividends. A falling PE due to rising E won't be that bad. This will all unfold over many decades so the pressure will be slight. The UK has had a stable population for 30 years and their market hasn't stagnated.

  6. I think this is true.

    I was a broker for Fidelity Investments for a number of years. On one of my trips to Headquarters, around 1999 or so, I got a tour of the "Charts Room". This was a room with a lot of walls covered with Charts of all kinds. They had giant printed out daily paper charts for all the indices, major (and some minor) stocks, bonds, etc. They also had all kinds of other charts posted, all of which I forget at this point except for one. It was a smaller chart of the Nikkei going back to about WW2. It showed the peak in 1989 and a continuous down since then that is pretty familiar. The interesting part was that they had overlaid the population demographics chart over top of the Nikkei. Guess what! They were a perfect match! And it has continued to match it from then until now. Next to the Nikkei chart with the demographics on it was the same chart with the S&P 500 overlaid with US demographics. And, if I recall correctly, the demographics line started down in 2006 or 7.


  1. […] Paul Kedrosky: Buy Stocks Until 2011, Then …. […]