Demographics As Well As Stock Prices

Zheng Liu together with Mark Spiegel at the San Francisco Fed wrote a really overnice letter  on demographics together with property prices, summarizing a lot of practiced academic operate on the question.

See the graph to the left, taken from the letter: M/O is the ratio of middle aged to old, together with P/E is the stock marketplace price-earnings ratio. 

It seems similar a natural story: In the 1970s, at that topographic point were relatively few prime-age savers roughly to purchase stocks, together with the prices fell. Starting inward the 1980s to like shooting fish in a barrel 1990s, boomers entered their prime number saving years, bought stocks together with drove the prices up. And immediately that the boomers are retiring, they kickoff selling, together with sentry out for prices! Zheng together with Mark brand a pretty discouraging forecast.


These facts dovetail amongst enquiry (my summary here, but lots of people lead maintain made this point) that high price/earnings ratios check to lower subsequent returns, together with depression price/earnings ratios correrpond to higher subsequent returns. One choice floor is that depression prices come upward when people await depression increment inward cashflows, together with high prices come upward when people await amend futurity cashflows. That floor does non plough out to live on truthful on average. So the buying together with selling pressure level stance is consistent amongst those facts.

I'm soundless non convinced, however, for a few reasons (all completely acknowledged yesteryear Zheng together with Mark -- no combat here, we're only dissecting the evidence). First, empirically, movements inward stock prices are virtually the equity premium, how much more yous await to earn on stocks rather than bonds, non the overall grade of returns. Stock prices are virtually the willingness to bear risk, non virtually saving or dissaving. If it's all virtually saving together with dissaving, nosotros should meet bond prices together with yields (adjusted for expected inflation) displace correct along amongst stock prices together with expected returns. To build a demographic theory of stock prices together with returns nosotros lead maintain to struggle non that people desire to salve to a greater extent than inward middle age, but that they expire less risk averse inward middle age. Maybe, but it's a dissimilar story.

Second, markets are internationally linked. There may non live on whatsoever American savers  to sell your stocks to when yous retire (especially if the taxation of investment returns rises sharply). But at that topographic point volition soundless live on a billion Chinese! 

Empirically, yous tin meet at that topographic point are virtually 3 information points, together with Zheng together with Mark admit playing a fleck amongst the demographic data. Lots of other things generate the same correlation amongst P/E ratios. In my research, I've been emphasizing the link to economical weather condition that yous tin likewise meet inward the P/E plot -- practiced prices inward practiced times, bad prices inward times of recession or stagnation.

However, this is likewise a to a greater extent than of import inquiry than people think. Stocks earned virtually 8% existent together with virtually 6% or then to a greater extent than than bonds over the long histories of information nosotros have, starting inward either 1926 or post WWII. Many people bake inward the thought that nosotros volition expire along to larn dandy returns similar these inward the future. Many pension funds discount at that topographic point liabilities at these high rates of return.

Maybe, perchance not. There are lots of stories that the expected furnish on stocks for the adjacent 20-30 years could live on a lower. Wider participation via index funds together with 401(k) -- wider jeopardy sharing -- is one. Demographics, whether local or global, are another. The lead a opportunity that nosotros volition displace into a few decades of deadening economical increment is another.

"Who volition yous sell your stocks to when yous retire?" is an of import question. With express data, thinking through the diverse stories to meet if they brand feel is the alone agency to brand much progress.