The world population continues to grow — nevertheless, only outside of the industrialized nations. For the capital markets, that does not bode well: Those who retire pull their capital out. And that’s what the baby-boomer generation is presently doing.
If one believes Fed members Zheng Liu and Mark Spiegel from the Federal Reserve in San Francisco, the first small waves of a trend that are sloshing around the feet of stock investors could be one of the most important determinants for stock yields: The talk is about the demographic change and its influence on investing behavior, because the global population is growing by just under 80 million per year. The growth, however, is unevenly distributed and characterized by one feature in the U.S. as in many other industrialized nations: Baby boomers in the generation from 1946 to 1965* are gradually retiring.
And this development also means they are no longer providing for their old age with savings plans or pension funds, but are spending the savings or at least re-allocating it to lower-risk investments than stocks.
In fact, studies have proven that already for half a century, there has been a significant connection between the level of value that investors give the U.S. stock market and the number of Americans who are at the peak of their professional career — i.e., 40-49 years old. This would explain the boom of the American stock markets in the ‘80s and ‘90s, as well as the subsequent stagnation starting in 2000 — and, above all, the continuing crisis in the Japanese stock market since 1990: Hardly any other industrialized nation is aging as drastically as Japan.
And — the researchers from the Fed in San Francisco warn anyway — it could mean that even with unchanged corporate profits, the U.S. stock markets could be cut in half again by 2025, because one gives them only a price-earnings ratio half as high as at present.
Part 2: More Than a Phenomenon
The historically low investor yields in industrialized nations can likewise be explained at least in part by the demographic change. They could be more than just a crisis-induced, temporary phenomenon: Because older people are more adverse to risk than younger people when investing, the demand for perceived safe investments like government bonds rises, while the demand for stocks falls and is frequently even re-allocated when entering retirement.
Researchers consider the well-established theory of a real capital meltdown due to the demographic change as exaggerated: After all, the information about the probable population development in the coming decades is known and therefore already priced into the market.
In addition, investment has also embraced globalization: While investors 20 years ago stayed mostly in their own country when investing in stocks, today a global distribution is more popular — which also means that the means of strongly growing economies, such as Asia’s, also flow into the stocks from Europe and the United States.
Undisputed is, of course, the connection between population growth and economic growth — which again allows a conclusion from the viewpoint of investors in the shrinking industrialized nations: With a distribution, with a portion of money invested in countries whose population is growing as fast as the economy, the effects of the demographic change can at least be cushioned.
*Editor’s Note: The baby boomer generation is typically cited as those born between the years 1946 and 1964.