Retiring Baby Boomers may Cripple Stock Market Recovery

The stock market may be in for another series of blows as baby boomers retire and sell off their portfolios, economists predict in Boomer Retirement: Headwinds for U.S. Equity Markets?, released by the Economic Research Department of the Federal Reserve Bank of San Francisco (FRBSF).

Historical data points toward seniors selling their equity holdings, rather than buying stocks, once they reach retirement age. For the next 19 years, Pew Research indicates, 10,000 baby boomers will turn 65 each day, and the stock market will likely bear the implications of the generation’s retirement actions. Currently, 13% of the U.S. population are 65 or older, and this will increase to 18% by 2030.

“It is disconcerting that the retirement of the baby boom generation, which has long been expected to place downward pressure on U.S. equity values, is beginning in earnest just as the stock market is recovering from the recent financial crisis, potentially slowing down the pace of that recovery,” reads the letter.

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Market booms in the 1980s and 1990s could be attributed to the baby boomers entering middle age and accumulating their financial assets, say the FRBSF researchers, and the converse may be true as this generation retires.

The researchers used a statistical model that examines the relationship between the equity price/earnings (P/E) ratio, and the age distribution ratio between the middle-aged (40-49) and old-age cohorts (60-69) (M/O), and found a strong correlation between the two.

Between 1981 and 2000, as baby boomers reached peak working and saving ages, research found, the higher M/O ratio led to a tripled P/E ratio. Then, in the 2000s, as boomers started aging, both the P/E and M/O ratios began to decline.

This evidence suggests that the United States’ equity values are closely related to the age distribution, says FRBSF.

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Using projected U.S. Census Bureau data for age distribution estimates, the researchers again examined the relationship between the M/O ratio and the P/E ratio to predict the future trajectory of equity performance. They found that the potential P/E ratio will decline persistently in the next 15 years or so as the population ages, before recovering somewhat by 2030. This correlated closely with predictions for the actual P/E ratio.

“Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010,” the researchers say. “The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027.”

Despite a gloomy outlook, FRBSF says, the M/O ratio is expected to “rebound” in 2025, leading them to expect a strong stock recovery.

Read the full economic letter here.

Written by Alyssa Gerace

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  • This is an interesting theory.  It matches in part the theory for why the dot com collapse was so dramatic. 
     
    With a huge base of defined benefit plans in the private sector, investment advisers were desperate to buy products which could be justified under the prudent businessman rule.  It seemed dot com had the potential to drive up returns while they could buy more conservative return assets to offset the risk.  As “earnings” kept going up, investment advisers were forced to buy dot com stock until it almost became a scarce commodity.
     
    Then as more and more private sector defined benefit plans were terminated, fewer and fewer dollars were chasing the elusive value in dot com stocks.  Soon other institutional investors saw the hand writing on the wall and the rest is history, DOW and NASDAQ highs which will not be reached for another two decades from this report.
     
    Of course this is a far too simplistic picture of what actually occurred but was a significant factor in the fall of equity market peaks.  The corollary of this theory is that as pension obligations to beneficiaries begin to exceed contributions and earnings, assets will be sold to meet cash outflow obligations.  That is how they were designed and that is how they are working.  Unfortunately the same is going on with defined contribution plans and IRAs.
     
    But could the retirement situation have a double whammy effect?  What is meant by this is that as pension investment does down and the value of the remaining assets drop, pension plans will sell more equities, not less, just to maintain the same cash inflow.  More and more plans may choose to annuitize their assets rather than relying on the acumen of investment advisors.  That could have an interesting strain on the ability of those providing annuities to maintain adequate returns.

    This situation only emphasizes the need for reverse mortgages. 

  • This is an interesting theory.  It matches in part the theory for why the dot com collapse was so dramatic. 
     
    With a huge base of defined benefit plans in the private sector, investment advisers were desperate to buy products which could be justified under the prudent businessman rule.  It seemed dot com had the potential to drive up returns while they could buy more conservative return assets to offset the risk.  As “earnings” kept going up, investment advisers were forced to buy dot com stock until it almost became a scarce commodity.
     
    Then as more and more private sector defined benefit plans were terminated, fewer and fewer dollars were chasing the elusive value in dot com stocks.  Soon other institutional investors saw the hand writing on the wall and the rest is history, DOW and NASDAQ highs which will not be reached for another two decades from this report.
     
    Of course this is a far too simplistic picture of what actually occurred but was a significant factor in the fall of equity market peaks.  The corollary of this theory is that as pension obligations to beneficiaries begin to exceed contributions and earnings, assets will be sold to meet cash outflow obligations.  That is how they were designed and that is how they are working.  Unfortunately the same is going on with defined contribution plans and IRAs.
     
    But could the retirement situation have a double whammy effect?  What is meant by this is that as pension investment does down and the value of the remaining assets drop, pension plans will sell more equities, not less, just to maintain the same cash inflow.  More and more plans may choose to annuitize their assets rather than relying on the acumen of investment advisors.  That could have an interesting strain on the ability of those providing annuities to maintain adequate returns.

    This situation only emphasizes the need for reverse mortgages. 

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