I’m surprised there are not more studies about the consequences of aging demographics for equity markets. _________________________________ http://www.bloomberg.com/news/2011-08-22/baby-boomers-selling-shares-may-depress-stocks-for-decades-fed-paper-says.html Aging baby boomers may hold down U.S. stock values for the next two decades as they sell their investments to finance retirement, according to researchers from the Federal Reserve Bank of San Francisco. Americans born between 1946 and 1964 are beginning to retire as the U.S. stock market is still recovering from the financial crisis that began in 2007 with the collapse of the subprime-mortgage market. The timing is “disconcerting” and, since stock prices have been closely tied to demographic trends in the past half century, “portends poorly for equity values,” adviser Zheng Liu and researcher Mark Spiegel wrote in a paper released by the bank today. The equity-price-to-earnings ratio of U.S. stocks tripled from 1981 to 2000 as baby boomers reached their peak working ages, and has declined since then, according to Spiegel and Liu. Overseas investors’ demand for U.S. stocks might help mitigate the effect of a baby-boomers’ sell-off, yet the impact would probably be limited, they said.
Interesting but I’m wondering if the amount of volume baby boomers would sell would have a major impact relative to the amount of volume that algos and hedge funds are spitting out.
Algos and hedge funds are not necessarily buying (investing for the long-term). Many have had good returns during the last decade while the market returned 1% annually since 2001. Seems like emerging market investors will have to save the US stock market. Will Chinese investors be allowed to buy US equities in droves one day? The study seems to show a very strong correlation between domestic demographic trends and stock market returns.
More and more signs are pointing towards fixed income being the most efficient (return on a risk adjusted basis) means of investment moving forward.
This was a Bloomberg article in 2009. Bonds outperformed stocks over the 30 year period from 1979 to 2009. I believe it was the first time it has ever happened over a 30 year period. “The Ryan Labs Total Return Indices, which track bonds by continually adding the most recently sold security and removing the old one, returned 1,479 percent in 30 years. It beat MSCI’s Gross World index of buying developed market stocks and reinvesting dividends, which added 1,265 percent.”
Apropos to nothing, but wouldn’t most retirees be living off fixed income rather than selling principal. However, if you genuinely think that there will be a general sell off, you could go always short the S&P and go long firms that produce medical products for the elderly as that is where the money would flow
Well, we sort of knew this was coming. I remember thinking about this around the time of the dot-com boom… wondering what happens when retirees sell stocks to live. But there are some mitigating factors. For the very wealthy - and the very wealthy own substantially more stocks than the middle and working classes - they should be managing their portfolios not with time horizons based on their own retirement and mortality, but with time horizons based on their children and grandchildren’s lifetimes. They really should be more like endowments, which have larger equity exposures and will not necessarily change greatly over time. Pension funds will have drawdowns as retirees increase, but these are already highly focused on fixed income. They will, presumably, lower their equity allocations, but probably not enormously. Some people who are underfunded may throw hail mary passes by allocating into equities. However, I suspect that the total AUM from these people would be marginal. They’re underfunded because they didn’t sock away enough to begin with, and so the allocation changes won’t be that much either. Lower demand for equities - to the extent that it happens - will raise the cost of capital, because it will take higher returns to entice people to invest in equities. That will make businesses less profitable and shrink, but it will also mean that those which survive will deliver higher total returns, because that’s what “required return on equity” actually means. The way those higher total returns will be delivered is that PE ratios will drop over time, and then higher earnings yields will take place off of those lower levels. So we’ll be hit by the valuation changes, but not necessarily changes in ROA or ROE. It’s not completely bleak, but it’s true that baby boomers entering peak years was especially good for the economy.
bchadwick Wrote: ------------------------------------------------------- > Well, we sort of knew this was coming. I remember > thinking about this around the time of the dot-com > boom… wondering what happens when retirees sell > stocks to live. > > But there are some mitigating factors. > > For the very wealthy - and the very wealthy own > substantially more stocks than the middle and > working classes - they should be managing their > portfolios not with time horizons based on their > own retirement and mortality, but with time > horizons based on their children and > grandchildren’s lifetimes. They really should be > more like endowments, which have larger equity > exposures and will not necessarily change greatly > over time. > > Pension funds will have drawdowns as retirees > increase, but these are already highly focused on > fixed income. They will, presumably, lower their > equity allocations, but probably not enormously. > > Some people who are underfunded may throw hail > mary passes by allocating into equities. However, > I suspect that the total AUM from these people > would be marginal. They’re underfunded because > they didn’t sock away enough to begin with, and so > the allocation changes won’t be that much either. > > > Lower demand for equities - to the extent that it > happens - will raise the cost of capital, because > it will take higher returns to entice people to > invest in equities. That will make businesses > less profitable and shrink, but it will also mean > that those which survive will deliver higher total > returns, because that’s what “required return on > equity” actually means. > > The way those higher total returns will be > delivered is that PE ratios will drop over time, > and then higher earnings yields will take place > off of those lower levels. So we’ll be hit by the > valuation changes, but not necessarily changes in > ROA or ROE. > > It’s not completely bleak, but it’s true that baby > boomers entering peak years was especially good > for the economy. it would be interesting to attempt to quantify the power of “risk-on” that is generated from inheritances over time. as the primary capital holders in our society die, with a heavy weighting in fixed income and this is inherited by those who can tolerate more risk, there should be an increase in equity holdings, helping to balance out the effect of “risk-off” due to withdrawals used for living expenses. also, as life insurance contracts (which are backed mostly by bonds on insurers’ balance sheets) come due, the proceeds will go to those with much higher risk tolerances and you could see maybe 40-60% of the value of all life insurance outstanding on baby boomers enter the equity markets over their equity drawdown period. that said, the process of converting fixed income to equity outlined above is reliant on the general public having a positive view of equity markets. it is possible that the ongoing withdrawal from equity markets could hinder sentiment enough to avoid much of this conversion. when i think of the withdrawals that baby boomers will make, i can’t help but think of “day-of” VWAP sell algorithms (those that cross the market or load up the ask when trades are executed) that severely depress a stock, mostly due to the sentiment change that occurs as traders begin to notice that this algorithm is in place. we can easily see these algorithms in the Canadian small cap market for those who wish to view how they can destroy stock sentiment. most iron ore and copper small caps under ($1B EV) encounter these algorithms at one point every week. i would have to think that the sentiment effect would be similar if this were to occur in equity markets in general and could depress sentiment similar to the early 1980s.
^^ that said, i think equity markets would be poised to see another long period of outsized gains when sentiment begins to turn.