Tuesday, September 18, 2012

Demographics and stock returns

Bloomberg/Businessweek recently featured a demographic debate about stock returns. On one hand, the author featured a bearish outlook from Harry Dent [emphasis added]:
An economics blog posted a depressing speech given by author and newsletter writer Harry Dent, called “A Decade of Volatility: Demographics, Debt, and Deflation.” “There is,” Dent says, “simply no way the Fed can win the battle it’s currently waging against deflation, because there are 76 million Baby Boomers who increasingly want to save, not spend. Old people don’t buy houses!”

He explains that the peak of the recent housing boom featured upper-middle-class families living in 4,000-square-foot McMansions. “About ten years from now,” he says, “what will they do? They’ll downsize to a 2,000-square-foot townhouse. What do they need all those bedrooms for? The kids are gone. They don’t visit anymore. Ten years after that, where are they? They’re in 200-square-foot nursing homes. Ten years later, where are they? They’re in a 20-square-foot grave plot. That’s the future of real estate. That’s why real estate has not bounced in Japan after 21 years. That’s why it won’t bounce here in the U.S. either. For every young couple that gets married, has babies, and buys a house, there’s an older couple moving into a nursing home or dying.”
On the other hand, the Echo Boomers are starting to come into their own and their peak savings years, which should boost stock prices:
Dave Wilson charted the number of Americans who were 35 to 39 years old at midyear, as compiled by the U.S. Commerce Department, with the Standard & Poor’s 500-stock index’s performance since 1980. At least where equity valuations are concerned, the picture does not lend weight to Dent’s inevitable-inexorable-deflation thesis.

For Josh Brown’s part, he and business partner Barry Ritholtz observed that the timeline of a boom in 35- to 39-year-olds “coincides perfectly with the time frame we’re guesstimating as the end of the secular bear market we’ve been in since 2000. (They tend to run 17 years on average.)”
Here is the chart.

Watch the interaction between generations
Who is right?

Actually, both are right. I continue to believe in my thesis that US equities will bottom around the bottom of this decade (see A stock market bottom at the end of this decade). I base my conclusion on two important demographic studies, the first from the San Franciso Fed (see paper here) and the second from academics, i.e. Geanakoplos et al (see paper here).

Dent's point is about the demographic headwinds posed by the Baby Boomers. Wilson focused instead on the Echo Boomers. Both the Geanakoplos paper and the SF Fed paper analyzed the interaction between the two generations. Geanakoplos concluded that a generational stock market bottom would occur about 2018, while the SF Fed put the timing of the bottom in 2021.

Harry Dent makes the same point in this graph below. Reading between the lines, he is projecting a stock market bottom about the end of this decade.

Don't just listen to the rhetoric, look at the data and make your own conclusions.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


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WimpyInvestor said...

Great article. Citi's Tobias has been calling for Raging Bull Market starting 2013 based on the Echo Boomers / Millenials.

I've been struggling with the age bracket definitions:
1. Dent uses 46 years.
2. Most academic research I've seen uses middle age cohort of 40-49.
3. Dave Wilson (& Tobias) use 35-39.

My own interpretation is that the "middle age cohort" got moved down based on the assumption (or reality) that in our global, tech driven economy, peak career earning is 35-39. Just look at Marissa Mayers (36), CEO of Yahoo, and other Facebook and Google executives in their mid-30's.

In the old days of pensions and lifetime employment (loyalty to corporations), the peak income (and thus consumer spending) came at 46 (20 years after MBA). Now, if you are 46, you have probably been laid off 1-2 times, switched careers 2-3 times, and suffered 2-3 investment bubbles. Not the best time to begin being bullish US stocks (or spend money to drive GDP).

Any insights on the 35 lower age range as the new definition of "middle age cohort"?


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