Monday, August 11, 2014

A new Golden Age of demographic growth

Back in 2011, I wrote about how US age demographics was likely to drive a new secular bull market at the end of this decade (see Wait 8 years for a new bull?). I cited research from a team of academics led by John Geanakoplos who wrote a paper entitled Demography and the Long-Run Predictability of the Stock Market. I wrote:
In this study, Geanakoplos et al related demography to long-term stock returns. They found that P/E ratios were correlated to the ratio of middle-aged people to young adults, otherwise known as the MY ratio. When MY rises, the market P/E will tend to rise and when it falls, P/Es tend to fall.

If the conclusions of the study are correct, then we should see a continued fall in P/E ratios with a long-term bottom in stock prices forming about 2018, or eight years from now.
In 2012, I followed up with a post about a San Francisco Fed study entitled Boomer Retirement: Headwinds for U.S. Equity Markets? The SF Fed researchers used a slightly different methodology than the paper by Geanakoplos et al, and they postulated a market bottom in 2021 (see A stock market bottom at the end of this decade).

Now I see that Bill McBride of Calculate Risk has approached this issue of demographics in a slightly different fashion but coming to a similar conclusion. He is calling for a boom in housing at the end of this decade (via Business Insider):
McBride argues that currently, with so many 20-24 year olds, the demographics are very favorable to apartment renting. And so of course these days, the multi-family housing sector has been leading the way. And you hear all these stories about how people aren't into homeownership anymore. But the demographics that are currently favorable to apartments will turn into demographics favorable to homeownership, as the cohort gets older, moves into higher paying jobs, and wants more space for those new babies.

Bottom line: As the Echo Boomers age, they get more affluent, start to have babies and they will drive a bull market in housing, as well as the stock market. It`s nice to get confirmation of my demographically driven analysis from an well-respected source.


eah said...

demographic growth

I think you mean population growth. Or perhaps changes in the demographic makeup of the population as it grows.

Population growth in the US is bringing ethnic demographic change -- ie a recent story featured on the Drudge site told how Whites are no longer a majority of kids entering school; likely before 2050, and assuming current immigration/birthrate trends do not change, they will no longer be even the largest ethnic group -- that will be Hispanics.

Data clearly shows that Hispanics create far less wealth per capita than Whites -- they do significantly less well in school, and are more criminal (you get a hint of this by looking at the state of the countries where these immigrants are coming from).

Question: Do you -- or anyone -- consider those facts in your observations?

Cam Hui, CFA said...

As per my previous post:

America is also becoming more Asian, who outperform Whites. Did you consider those facts in your comments?

Anonymous said...

I'm sure he didn't consider the more asian agnle because there is no need to. It's inconsequential. As you know, it's all about hispanics.

But back to why i really wrote.

ticker db. What in the heck is that telling us about Germany?

Cam Hui, CFA said...

There are a number of problems with your comments.

First, "Hispanics" is not a racial group, but a self-identified group by language. Not sure how much someone from Spain has in common with someone from Argentina or Guatemala.

Second, you state that 1) There will be more Hispanics than Whites before 2050; and 2) They underperform.

You cite no studies to back up those assertions. Key questions:

Is the growth of the Hispanic from higher fertility, or from immigration?

If they are from immigration, show evidence that Hispanic immigrants under or outperform other immigrant groups in the past. My personal impression is that, as a group, they work very hard (and harder than native born Whites). That would the essence of the immigrant experience.

If the growth is from higher fertility rates, then show the evidence of the difference in fertility rates, or difference in age demographics that lead to such a conclusion. If so, why would you not want a younger population as that would address the demographic time bomb that America is facing?

Or is the problem that "brown people" are going to take over America?