How will the market/indexes be affected?

[eytonxav]

If you consider baby boomers moving into retirement, I wonder if the stock market will correlate to the issues facing social security and medicare, a smaller next generation population. For example, as baby boomers start to sell their equity assets to make ends meet, where are all the new buyers going to come from and if there are fewer new buyers it would seem that many will be in for a horrific surprise. When looking at market history, I don't believe there is any data that would indicate the affects of a high population of older investors selling their assets, so are any of these regression engines/analysis even valid in this upcoming scenario? My guess is this will have a large affect on the younger ERers.

Doug

 

[unclemick]

Capital markets are capital markets and therein lies the rub - they exist to raise capital. ? So boomers, foreigners(ADR,s, holding USD in bonds), world business climate including the US, etc. are all factored in. Boomers are just one factor of many (perhaps a large one) - but I discount any articles that don't attempt to include international capital flows. In short I haven't a clue. I believe the markets are historically 'high' right now with too much money chasing too few capital opportunities - but that's only one opinion.

 

[wabmester]

The stock market is more or less a reflection of the economy.  As GDP grows, earnings and dividends grow, and company valuations grow.

Anything that slows GDP growth should impact the market.   There are countries that are in worse shape than the US as far as aging populations and increasing costs of social programs.   Japan, Germany, and Italy for example.

So, to some extent, we can look at the stock markets of these countries to see our own future.   Japan is just coming out of a long period of negative GDP growth and deflation.   Germany's economy is struggling.  Their stock market performance has been dismal for years.

 

[Cut-Throat]

There are countries that are in worse shape than the US as far as aging populations and increasing costs of social programs. Japan, Germany, and Italy for example.

I would guess that this is the reason we need plenty of young immigrants. To pay my Social Security and keep the economy humming along.

The problem that bothers me is sending jobs overseas. No one here left to pay for the Social Security.

 

[Michael]

For example, as baby boomers start to sell their equity assets to make ends meet, where are all the new buyers going to come from and if there are fewer new buyers it would seem that many will be in for a horrific surprise.

I was looking for reliable immigration adjusted birth rates, with the intention of cross referencing population growth trends with market performance.  So far, I have not found the birth rates back to the early 1800s that I am looking for.  If you find some, let me know and I will plug them into an Excel spreadsheet.

It seems likely to me that the boomers saving for retirement are the primary cause of today's expanded valuations.  The large size of the cohort, combined with changes in the tax code (401k) that force boomers to put the growth portion of their 401k money into equities has increased demand for equities.  Defined benefit plans also are legally constrained in what they can invest in, and put a lot of money into equities.  In 1950, pension plans of all  types held .8% of US equities.  By 1988 they held 27.3% of all US equities.  This is quite a jump, and represents a lot of buying pressure.

Of course, if President Bush succeeds in directing part of the payroll tax into equities, this could intensify demand for equities enough to at least partially compensate for the boomers (and the defined benefit plans that serve them) cashing out.  Foreign demand for US equities will depend a lot on what alternatives they may have available.  If the boomers moving out of their prime spending years leads to stagnation like in Japan, US equities might not be too popular.   This could lead to multiple contraction.

I agree that immigration could help a great deal during this time.  A lot of young immigrants would not only pay US taxes, but also increase demand for US investments.  Importantly, they would keep the economy growing strongly by creating demand for the output of US corporations.  Profits would be able to continue to grow at a decent clip.  Of course, future politics is hard to predict, but our nation is much more accepting of foreign immigration than Japan is.  I would expect more immigration than Japan allowed when their baby boom retired, but maybe not enough to get us painlessly through the boomer's retirement.

 

[Bob_Smith]

Another possible factor to consider. Don't the boomers parents' still hold an incredible amount of wealth yet to be transfered to their children? Many of that generation have avoided the stock market. They hold CDs, land, real estate, etc. Perhaps that transfer of wealth will reduce the need for boomers to sell their equities at low prices and dampen the overall impact.

 

[John Galt]

Remember this folks. Everyone has to live somewhere.
Our government constantly pushes home ownership in a whole variety of ways. Thus, if you own places where
people can and wish to reside, you will always have buyers for your property.

John Galt

 

[wabmester]

Remember this folks.  Everyone has to live somewhere.

Also remember that ultimately land is just a bunch of dirt, the only value of which is to keep other dirt from moving around. And houses really do depreciate as they decay. And real estate agents are part of an anti-consumer monopoly, not to mention lenders, and escrow agents. And then there's county governments, insurance, and constant maintenance.

Other than that, I love real estate too

 

[Michael]

Perhaps that transfer of wealth will reduce the need for boomers to sell their equities at low prices and dampen the overall impact.

The significant wealth tends to be concentrated in a relatively small percentage of families. Most boomers will not inherit significant resources. Many will actually have to supplement their parents' income in their latter years so they can afford their medicine.

Thus, if you own places where
people can and wish to reside, you will always have buyers for your property.

Well chosen real estate is an excellent investment. I don't have the temperament to be a landlord, but this is a good strategy for those who do.