For the better part of two decades some market sages have warned that stocks could face a stiff, steady headwind as retiring baby boomers trim their equity holdings in favor of more conservative allocations and start spending their nest eggs. It’s the flipside of the view that the great bull market of the 1980s and ‘90s was partly fueled by the boomers surging into the prime earning and saving phase of their lives.
Demographics certainly can influence markets, but it’s probably more of an indirect effect tied to the relative dynamism of the national economy. Recent studies question the idea that retiring boomers will tank stocks. Several years ago the U.S. Government Accountability Office determined that demographic variables account for less than 6% of the stock market’s variability of returns. A more recent study by the Vanguard mutual fund company cited several key factors that counter the boomer-sell-off scenario.
Yes, the boomer generation is large: 76 million U.S. births from 1946 through ‘64. But the rate at which they retire and the manner of doing so will vary widely. Besides, there were 50 million Gen-Xers born from 1965 through ’76, and 70 million Gen-Yers born 1977-2002. The supply of workers/savers/investors doesn’t exactly end with the boomers. In fact the U.S. has one of the better profiles among large nations with respect to the growth of the 15-64-year-old population.
Yes, as of 2010 boomers owned nearly 47% of U.S. equities. But that’s not statistically different from the share their parents’ generation held 20 years earlier. Older folks generally own more financial assets than younger folks. Nothing new about that. And in trying to gauge the selling pressure that might come to bear, it’s worth noting that the wealthiest 20% of boomers hold 96% of the equities held by their age cohort, and 77% is held by the wealthiest 5%. Will these folks need to dump stocks to make ends meet?
Yes, boomers could start leaning more conservative in their portfolio allocations. But with interest rates so low, will that really play out as a big shift from stocks to bonds? Besides, global demand for U.S. stocks has risen markedly over time. Thirty years ago foreign holders owned only about 7% of the U.S. stock market; today they own more than 20%.
Yes, the nation is seeing demographic changes and longer life expectancy. But using extensive data from the International Monetary Fund, MSCI, and FTSE, Vanguard analyzed cross-country changes in the relative number of retirees versus inflation-adjusted stock returns from 1980 through 2011. They found no correlation between the two.
It is always tempting to latch on to one or another statistic or factor as the determinant of tomorrow’s investment environment. But over time markets are driven by more factors than can be parsed and prioritized with absolute precision. And those factors that weigh negatively on stocks help create the opportunity to capitalize on those factors that weigh positively.