7. Aging + Markets: Schools of Thought
• Key Proponents: SF Fed
Researchers, Research
Affiliates, Harry Dent
• Claim a relationship
between aging and
market P/E
• Claim other countries
show negative returns
corresponding to age
• Key Proponents: MIT
Prof. James Poterba,
Vanguard research team
• Claim weak relationship
between aging and
equity performance
• Boomers won’t really
sell a high percentage of
stocks
Optimists Pessimists
sources: Vanguard, NBER, SF Fed, Research Affiliates
8. Aging + Markets: Optimistic View
sources: Vanguard, NBER
The relationship between increases in % of retirees and stock
returns is weak at best
NBER study found no relationship between stock prices and
aging, and a mild relationship between P/E and aging
Terrible R2
9. Aging + Markets: Pessimistic View
Research Affiliates
Data from 60 countries,
model market return by age
group
Found strong negative
impact for 65+ age group
SF Fed
Modeled P/E vs ratio of
middle age to old in USA
Found that P/E tracks with
larger middle aged group
Model indicates market P/E
may fall until 2025
sources: SF Fed, Research Affiliates
12. Reality: Baby Boomers + US Equities
• Boomers at age 40
Begin equity investing
• Market up 614%
• Boomers at age 60
• Reduce Equities
• Market up 61%
sources: Vanguard, Google Finance
S+P Logarithmic Return
Will returns get worse as Boomers age?
1985-2000 2005-now
13. Reality: Gen X + Millennials Investing?
Activity Boomers Millennials
Marriage Age 23 30
Household Formation(18-31) 56% 23%
% with college degree 25% 38%
Investment Vehicle 401(k) Robo
Millennials
Delaying life
Burdened
with debt
Don’t trust
stock market
Equities held by
Boomers age 46-64
Young Boomers did
not own equities
sources: AmericanProgress, Goldman Sachs, Vanguard, Bloomberg
14. Reality: Mitigating Factors (Demographic)
sources: HiddenLevers, SF Fed, Forbes, Zacks
Boomer
retirements
coming slowly
(over 18 years)
Boomers
living longer
+
still investing
Boomers need
to invest due to
lost savings in
2008 crisis
15. Reality: Mitigating Factors (Market)
sources: HiddenLevers, SF Fed, Forbes, Zacks
Globalization of US Stock Market
Wealth Concentration
1% of Boomers owns 1/3 of Boomer assets
10% of Boomers own 88% of Boomer equities
20% of Boomers own 96% of Boomer equities
Perpetually
Low Rates
+
Low Yields
18. GOOD: Millennials Fill Gap
source: HiddenLevers
Younger investors make up for Boomer outflows
Fixed income
fruitless for
Millennials/Gen X
Wealthy Boomers
don’t need to sell
Foreign demand
continues
EM outflows seek
shelter in US
equities
19. BAD: Gradual Decline
Boomers living longer + not retiring = no quick drain
source: HiddenLevers
lofty valuations
unsustainable
PE decline
25 20
gradual equity
sales don’t
compress PE
Millennial
entry delayed
20. UGLY: Mass Exodus
PE decline
25 15
source: HiddenLevers
Boomers liquidate equities to fund retirement
worker/retiree
ratio falls
sharply
2010 forecasted
decline now
5 years late
21. Scenario: Boomer Outflows
Good:
Millennials
Fill Gap
Bad:
Gradual
Decline
Ugly:
Mass Exodus
Market P/E
15
S&P
-40%
Market P/E
20
S&P
-10%
Market P/E
25
Millennials begin to enter
equity markets, filling the
gap left by aging boomers.
Wealthy boomers hold 90%
of equities, making excess
sales unlikely.
The gradual decline in
Boomer market participation
is offset by younger
investors, but market
valuations cannot maintain
current lofty levels.
Boomers do shift away from
equities, lowering demand
for stocks and compressing
S&P P/E to 15 by 2020s.
S&P
+35%
22. Boomer Outflows – Take Aways
Low interest rates force
everyone into equities
2008 Financial Crisis made
Millennials distrust Equity markets
10% of Boomers own lion’s share
of Boomer equities
S+P PE Ratio will compress if
Boomers start liquidating
