Demography versus the stock market

A reader asks:

Collective wisdom is that in the long run markets will go up. While this may have been the case in the past, it is the baby boomers who control the vast majority of the stock market on a generational basis, and they are in the process of selling out en masse to fund their retirement over the next decade. Is this a real concern that this will create endless selling pressure and keep returns low for decades to come? I come to this question as a 30-something, thanks.

Fair question.

I was at a Christmas party last week where a Generation Z relative asked a baby boomer relative if he thought Social Security would still be there when he retired.1

There is a sense that the boomers will leave the closets empty for generations to come. It’s possible, but I’m doubtful about using demographics to predict the path of the stock market.

First, demographic trends are fairly easy to map. The markets know what’s coming.

In the 2000s, many people assumed that baby boomers could support the stock market in the new century. Robert Shiller explained why it didn’t happen in the second edition of Irrational exuberance:

If lifetime savings patterns alone were the dominant factor in savings vehicle markets, there would typically be strong correlations in price behavior between alternative asset classes, and strong correlations over time between asset prices and demographics. When the most numerous generation feels they need to save, they tend to give up all the savings vehicles: stocks, bonds, and real estate. When the most numerous generation feel like they need to withdraw their savings, their sale could lower the prices of all of these vehicles. But when one looks at the long-term data on stocks, bonds and real estate, one sees that there has actually been relatively little correlation between their real values.

He did admit that perceptions of strong demographic tailwinds could help markets, but there is no evidence in the data.

Look no further than Harry Dent’s predictions to see why using demographic data to predict the market is a lost cause.

It is true that boomers own most of the wealth in this country:

If all the boomers decide to sell at once, it would make sense that the financial markets would come under pressure, but I don’t think that will happen.

First, people are living longer today.

It’s not like you have a 10 year window to retire like people did in the past. A 65-year-old man in the United States has a life expectancy of 85 years. For women, that is 87 years. If you are a married couple of retirement age, there is a 50% chance that one of you will live to age 95.

We’ve never seen a demographic as large as the baby boomers as long as they live.

It is therefore not the case that all sales take place at once.

And many boomers won’t sell much of their wealth at all. They are simply going to pass on some or most of their money to the next generation.

Think about it – the top 10% of wealth in this country own 90% of the stock. People in the wealthy class don’t have to spend all their money. Ultimately, the next generations will get a share of that wealth.

Boomers don’t have their whole nest egg in the stock market either. The middle class has most of their wealth tied up in their primary residence:

You could argue that the housing market will be more strongly influenced by boomers selling than by the stock market.

But even there we have plenty of young people moving up the ranks to catch up when boomers sell their stocks or homes. Millennials are a larger demographic than the boomers. Gen X will probably catch them by the end of this decade as older people start to die.

The largest age group at the moment is 20-34. The The 35-49 cohort is the same size as the 50-64 group. There are more people in the 5-19 age category than the over-65s.

That 65+ bucket will continue to grow, but millennials are about to hit their peak income years and they are the most highly educated demographic in history. That should translate into higher wages and thus the ability to invest their money in the stock market.

There are also structural reasons why the baby boomers will have a more muted impact than you might think.

Markets are more global than ever and investors have never had easier access to invest in them.

We now have automatic investments through 401ks, IRAs, roboadvisors, target date funds and online brokerage accounts that you can fund in minutes on the super computer in your pocket. Educating yourself about finances has never been easier.

Investing itself is still a challenge, but barriers to entry in the stock market have never been lower.

There are always plenty of risks associated with investing in the financial markets. I’m not too concerned about baby boomers as a potential catalyst for poor returns in the future.

We discussed this question in the latest edition of Portfolio Rescue:

Josh Brown joined me again to discuss this question and the Fed versus inflation, flat rate versus dollar cost averaging, investing in real estate and figuring out where to invest after a crisis.

1Read here why I’m not so worried about Social Security.

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