Excerpt:
Demographics are the most important factor in determining long-term market
trends, according to the professors, who believe that individual investment
behavior largely depends on age-related patterns. Younger adults, those from
20
to 39, are generally consumers. Middle-aged people, 40 to 59, tend to invest
in
stocks. Retirees are likely to sell more stocks than they buy.
----- Original Message -----
From: "William Tamblyn" <wmtamblyn@yahoo.com>
To: "Long Waves" <longwaves@csf.colorado.edu>
Sent: Monday, December 02, 2002 7:56 AM
Subject: An article on the study mentioned be David Elkin earlier today
I came across this article on LWSIDE1 and thought some might be interested
since David had referred to this study earlier:
nytimes.com
28&ei=1&en=a7be5d6277ecd321
16-Year Slump? If So, Blame It on the Boomers
By MARK HULBERT
A new study of American demographic patterns and the stock market predicts
that
while the market may rally periodically, its overall direction will be
downward
until around 2018.
This bearish forecast is based on a model devised by three finance
professors -
John Geanakoplos of Yale, Michael J. P. Magill of the University of Southern
California and Martine Quinzii of the University of California at Davis. In
a
study titled "Demography and the Long-Run Predictability of the Stock
Market"
(http://papers.ssrn.com /sol3/papers.cfm?abstract_id=329840), they report
that
their model has done a good job of explaining the bull and bear markets of
the
last century. But its accuracy as a forecasting tool, of course, is
untested.
The professors' approach is complex, but it depends on a simple indicator:
the
ratio of the number of middle-aged people to the number of young adults in
the
population. When this ratio rises, the overall market's price-to-earnings
ratio
will rise, too, the professors predict. When the age ratio declines, as it
is
likely to do until about 2018, the market's P/E will also decline.
Demographics are the most important factor in determining long-term market
trends, according to the professors, who believe that individual investment
behavior largely depends on age-related patterns. Younger adults, those from
20
to 39, are generally consumers. Middle-aged people, 40 to 59, tend to invest
in
stocks. Retirees are likely to sell more stocks than they buy.
Market performance is strongly affected by the relative numbers of people in
each of these three life stages, the professors say. When more people are
entering middle age than retiring, for example, the market tends to rise
because more people will be buying than selling. If the next generation of
investors is smaller, the trend will reverse when the middle-aged investors
retire.
The major influence of the next two decades will be the aging of the baby
boomers, the approximately 79 million people born in the United States from
1945 to 1965. This generation has about 27 million more people than the one
that preceded it, and about 10 million more than the one that followed.
The big difference in the sizes of these generations has already led to wide
swings in the stock market, the study found. As the first baby boomers
approached middle age in 1985 and began investing heavily, their buying more
than offset the selling of the older generation then entering retirement.
Stocks entered a multiyear bull market.
That trend is reversing, according to the model, which predicts that the
market
has entered a long decline caused by baby boomers selling stocks as they
approach retirement. The sales will be only partially offset by the
purchases
of the smaller group entering middle age.
The model predicts that this long-term trend will not turn positive again
until
after 2018, when retirees' stock sales will be more than offset by the
purchases of younger investors. This trend will strengthen as the larger
baby
boom "echo" generation, born between 1985 and 2005, enters middle age.
Since the professors began circulating their research as a working paper in
August, critics have been skeptical that the model will apply to other
periods
or countries as it has to American history. Professor Magill is using it to
study Japan, and so far it appears to hold up well. The model suggests that
much of the long-running bear market there can be explained by the high
ratio
of retirees to middle-aged people.
To derive from the model a long-term forecast for the American market, it is
necessary to estimate how fast corporate earnings will grow. Assuming that
they
grow at the same rate as they have over the last two decades, the model
predicts that the market, after inflation, will lose more than half its
value
through 2018.
Still, the model holds out hope for truly long-term investors. After all, if
the professors are right, a bull market lasting more than a decade will
begin
after 2018.
________________
Demography and the Long-Run Predictability of the Stock Market
by Dave Elkin
02 December 2002 00:41 UTC
Have you LWers here considered the demographic impacts of life-cycle
influenced
saving and investing, and the correlated rise and fall of asset prices?
Something akin to that has been written about by JOHN GEANAKOPLOS, Yale
University - Cowles Foundation, MICHAEL MAGILL, University of Southern
California - Department of Economics, and MARTINE QUINZII, University of
California, Davis - Department of Economicsm, in their work entitled
Demography
and the Long-Run Predictability of the Stock Market.
papers.ssrn.com
tractid=329840
Is there a particular wave or cycle that is highly correlated with
generational
/ intergenerational influences?
David Elkin
__________________________________________________
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