Federal Reserve: Aging Baby Boomers Will Crush Stock Prices by 50%

Article Summary:

• Aging patterns and stock values have a long historical relationship
• Baby Boomers are entering their prime ‘stock selling’ years with little relief from those entering their ‘stock buying’ years
• The December 2014 study updates a July 2011 study
• The patterns recognized in 2011 have actually gotten worse
• Baby Boomers should prepare for depressed stock markets with new ‘alternative investing’ vehicles

A brand new Federal Reserve research report has some pretty scary news for investors: aging Baby Boomers will cut stock market prices in half.

The December 22, 2014 research report comes from The Federal Reserve Bank of San Francisco and updates a previous study done by the same bank in 2011.

 According the report:

“Demographic patterns have a strong historical relationship with equity values in the United States”

 The report basically boils down the relationship between when investors buy stocks (primarily between the ages 40-49) and when they sell stocks (primarily between the ages 60-69).   They created a ratio for this age distribution called M/O (middle aged to old aged).

 The original study shows the relationship between M/O ratios and P/E ratios.

As you can see above, the historical M/O ratio moves in lock step with P/E ratios.   The researchers can then make predictions about future P/E ratios when using predicted M/O numbers based on American demographic data. The results are stunning. 

 The report predicts market P/E to go from its current number of 17 for the S&P 500 to 8.2 by 2025. That would effectively halve the entire stock market.

 This study updates a previous study from 2011 that predicted a 13% decline by 2027. But according to the new study, the demographic patterns have become even more severe.

 The new study goes on to account for global aging, and say some relief could come for foreign investors. China and Japan in particular could become even larger holders of American equities.  But relief from these investors is hard to predict as these populations are aging similarly to America’s.

 The message is clear: aging Baby Boomers, drawing on their retirement investments, will bring the stock market down.

 “Our current estimate suggests that the P/E ratio of the U.S. equity market could be halved by 2025 relative to its 2013 level.”

Of course economic theory papers can be found to support any argument. But investors must ask themselves honestly, what will the greatest mass retirement in history do to stock markets?

 So what should the average investor to do?

 Fortunately, thanks to legislation passed in 2012, there are alternatives to the stock market.

 New investing platforms like crowd-funding, peer-to-peer lending, and asset backed lending offer investments that were previously only available to the very wealthy. There are also more traditional investing vehicles like annuities, structured notes, and inflation protected bonds that could provide some relief.

 Diversification is always a key component in any portfolio. But diversification should include investments outside traditional markets.

Investors should take some time to look at alternative investments now before these trends start to negatively affect their own investments.