Demographics and stock returns

Bloomberg/Businessweek recently featured a demographic debate about stock returns. On one hand, the author featured a bearish outlook from Harry Dent [emphasis added]:

An economics blog posted a depressing speech given by author and newsletter writer Harry Dent, called “A Decade of Volatility: Demographics, Debt, and Deflation.” “There is,” Dent says, “simply no way the Fed can win the battle it’s currently waging against deflation, because there are 76 million Baby Boomers who increasingly want to save, not spend. Old people don’t buy houses!”

He explains that the peak of the recent housing boom featured upper-middle-class families living in 4,000-square-foot McMansions. “About ten years from now,” he says, “what will they do? They’ll downsize to a 2,000-square-foot townhouse. What do they need all those bedrooms for? The kids are gone. They don’t visit anymore. Ten years after that, where are they? They’re in 200-square-foot nursing homes. Ten years later, where are they? They’re in a 20-square-foot grave plot. That’s the future of real estate. That’s why real estate has not bounced in Japan after 21 years. That’s why it won’t bounce here in the U.S. either. For every young couple that gets married, has babies, and buys a house, there’s an older couple moving into a nursing home or dying.”

On the other hand, the Echo Boomers are starting to come into their own and their peak savings years, which should boost stock prices:

Dave Wilson charted the number of Americans who were 35 to 39 years old at midyear, as compiled by the U.S. Commerce Department, with the Standard & Poor’s 500-stock index’s performance since 1980. At least where equity valuations are concerned, the picture does not lend weight to Dent’s inevitable-inexorable-deflation thesis.


For Josh Brown’s part, he and business partner Barry Ritholtz observed that the timeline of a boom in 35- to 39-year-olds “coincides perfectly with the time frame we’re guesstimating as the end of the secular bear market we’ve been in since 2000. (They tend to run 17 years on average.)”

Here is the chart.

Watch the interaction between generations
Who is right?

Actually, both are right. I continue to believe in my thesis that US equities will bottom around the bottom of this decade (see A stock market bottom at the end of this decade). I base my conclusion on two important demographic studies, the first from the San Franciso Fed (see paper here) and the second from academics, i.e. Geanakoplos et al (see paper here).

Dent's point is about the demographic headwinds posed by the Baby Boomers. Wilson focused instead on the Echo Boomers. Both the Geanakoplos paper and the SF Fed paper analyzed the interaction between the two generations. Geanakoplos concluded that a generational stock market bottom would occur about 2018, while the SF Fed put the timing of the bottom in 2021.

Harry Dent makes the same point in this graph below. Reading between the lines, he is projecting a stock market bottom about the end of this decade.

Don't just listen to the rhetoric, look at the data and make your own conclusions.



Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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