Sharemarket to face boomer headwinds

The Federal Reserve Bank of San Francisco (FRBSF) yesterday released an interesting report (below) arguing that the US sharemarket will face considerable headwinds over coming decades as the retiring baby boomer generation shifts from buying stocks to selling equities to fund their retirement (h/t Bernard Hickey).

According to the report, a key reason why the US share market boomed over the 1980s and 1990s was because the baby boomers – born from 1946 to 1964 – had entered their prime working years and were saving for their retirements through stocks.

However, now that the baby boomers are entering retirement, they are divesting their risk assets, including shares, just as classic life cycle theory would suggest they do.

The FRBSF researchers have produced a chart showing the historical price-to-earnings (PE) ratio against the M/O ratio, which represents the ratio of middle-aged people (aged 40 to 49) against the old-age cohort (aged 60 to 69):

As you can see, the two data series are highly correlated, with the M/O ratio explaining around 60% of the movements in the PE Ratio during the sample period.

The researchers have then forecast the future trajectory of the PE ratio by calculating the projected M/O ratio using Census Bureau projected population data:

According to their forecast, the US PE ratio is expected to decline from around 15 times currently to around 8.5 in 2025 before recovering slightly in 2030. Moreover, real stock prices are expected to trend downwards until 2021, losing around 13% of their value relative to 2010. The subsequent recovery is also expected to be quite slow, with real stock  prices not expected to return to their 2010 level until 2027.

Implications for Australia:

I have written a great deal previously on the potential impact on asset prices arising from the baby boomer’s retirement, so I won’t go into great detail here. Instead, I will make only a few points.

First, according to the latest ABS Household Wealth and Wealth Distribution survey, the baby boomers (45 to 64 years old) held 54% of Australia’s financial assets, with those aged 65+ a further 22%, taking the older cohorts’ share of Australia’s financial assets to 76% (see below chart).

Second, Australia’s projected dependency ratio – defined as the ratio of the non-working population, both children and the elderly, to the working age population – is similar to the United States:

Finally, Australia appears to have experienced a similar uplift in PE ratios, albeit ours occurred in the 1990s (versus mid-1980s in the United States) and was not as pronounced (see below chart). Further, it is difficult to determine whether this uplift in PE ratios has occurred due to other factors, such as falling nominal interest rates and compulsory superannuation.

Nevertheless, the FRBSF’s analysis is interesting and confirms earlier research on this blog that the retirement of the baby boomers – a cohort representing a quarter of the population but holding around half of Australia’s housing and financial assets – will adversely affect asset values.

Over coming weeks, I will attempt to replicate the FRBSF’s modelling using Australian data in order to: (1) ascertain whether the same relationship between Australia’s demographic structure and PE ratios holds; and (2) predict the future long-term trajectory of the sharemarket.

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Leith van Onselen


  1. Look forwards to seeing your results UE.

    Just a guess at the lower PE uplift in australia could be due to the high level of privatisation that occoured during the period of study. Effectively indroducing ‘new’ companies to the market. I dont belive this occoured as substantially elsewhere in the world, particularly the US.

  2. I saw this released on Bloomberg. A couple of analysts (one Uni professor, etc) agreed there would be headwinds and then came out with the clangers of the century (right idea, wrong conclusion):

    “Overseas investors’ demand for U.S. stocks might help mitigate the effect of a baby-boomers’ sell-off”


    “At the same time, foreign investors, including sovereign wealth funds, may decide to hold a larger share of U.S. equities, Liu and Spiegel said. Also, emerging market countries such as China may ease capital controls, allowing their citizens to invest in U.S. equities, they said.”


    ” Jeremy Siegel, 65, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia, has also researched the link between demographics and U.S. stocks. He said that growth in developing countries should generate enough demand to absorb a baby-boomer selloff and “keep stock prices high.”

    As long as the economies of countries like China and India expand at an annual rate of at least 4 percent to 6 percent, investors “will have the resources to buy our stocks” and “keep our stock market fully valued into the future,” Siegel, author of the 1994 book “Stocks for the Long Run,” said in a telephone interview today.

  3. Excellent, that should assist my portfolio nicely. Hoping to follow up last years 200% gain with a similar one this year. Already up 20% before the first two months are out. Bring on the headwinds.

  4. I think there may be a mistake in the dependency ratio chart – how is the vertical axis in units of years if it’s a ratio?

    Nick – I’d agree that even if the developing nations do have the cash they’d probably have better things to invest in than the demographically hobbled western equity markets.

  5. Sandgroper Sceptic

    Excellent work. I am surprised the Fed allowed this one to even be released. Buy and hold is challenged again.

  6. Shouldn’t the label on the Y-axis of the dependency ratio graph read ‘percentage’, not ‘years’?

  7. Interesting, but at the same time, if 70% of the NYSE’s trade volume is from day traders, exactly how big can retiring baby-boomers’ impact be?

    Don’t forget as well that there’s a new generation who’ve also got to plan for their retirement, meaning they can take the place of the baby-boomers.

  8. Man I love this demographic stuff. Dent did it first (to my knowledge) on p46 of ‘The Great Depression Ahead’. Then we had this from the BOJ Deputy Reserve Governor on demographic links to real estate – and now this wonderful paper.
    Message is: Be careful with value investing – we will need more – learn the craft of trading.

  9. I am only a poor bum so it would be helpful if some-one could put this all into some perspective.
    Gold – Not an investment because it doesn’t pay a return. Can’t eat it or live off it – unless you make a capital gain.
    Real-estate – Potentially a very poor investment. Rental and net returns are lousy, and if you are a retiree and still have a leveraged property it won’t contribute to your retirement income.
    Equities (including REITs) – Yep – too risky – don’t want those either.
    Fixed interest – Ah that’s the go. The banks need all the money they can get – or do they?
    So where do you park your money?

  10. In British Columbia, the longer-term projections show a nice non-inverted triangle age demographic 50 years out. The only way they can hope to get that is with youth immigration. Will the Australian government attempt to jump the demographic shark?

    Look on the positive side: lower P/E ratios means fixed income is going to have a hard time competing. Notice the last dip in P/E corresponded to the removal of Bretton Woods, and a bout of large inflation. So if we are to see lower P/E ratios, either it means inflation is going to go for a ride or real rates are going up — which is horribly bad for housing.