The Herald Bulletin

Morning Update

Local Business

September 3, 2011

'Big Joe' Clark: Boomers' practices help explain US market decline

The baby boomer generation, born between 1946 and 1964, may be leading the stock market into a “baby boomer bust.”

Much has been written about what impact the largest generation ever in this country has had on the housing and employment markets, not to mention Social Security. However, another, less-publicized impact from boomers may likely affect the market for years.

Recently, the Federal Reserve Bank of San Francisco released a newsletter about boomers. “As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.”

Makes sense, if you think about it. We advisors always counsel our clients to shift their portfolios slowly away from the volatility of stocks as they near retirement. Well, the leading edge of the boomer generation just turned 65. Combine this with the lousy economy and housing market, and many boomers hit hard by one or both may already be out of the market.

Don’t panic yet. According to the FRBSF, there are some mitigating factors to consider.

“First, demographic trends are predictable, and rational agents should anticipate the impact of these changes on asset demand. Consequently, current asset prices should reflect the anticipated effects of demographic changes.”

The article goes on to point out that many retirees continue to hold stocks with an eye toward a longer-than-expected retirement and/or for leaving an inheritance.

Another mitigating factor is foreign demand for U.S. stocks. As rapidly developing countries enter a new period of heretofore unknown wealth, they may substantially increase investments in the U.S. equities markets, both on a national and individual level.

The study described in the FRBSF newsletter is an interesting one examining the relationship between the populations’ demographic mix and the stock markets’ overall price-to-earnings ratio. They found, over the last 56 years, a high correlation between the P/E and the proportion of middle aged to older people in the country.

The middle-aged (40-49) to older (60-69) ratio, or M/O was at an all-time high when the boomers were working their way through their 40s.

This may, in part, explain the bull market we were in the midst of during those years. However, as we moved into the 2000s, the P/E and M/O both started to decline. In fact, the article estimated that 61 percent of the movement of the P/E can be explained by the movement of the M/O.

The newsletter went on to predict that the “P/E should decline persistently from about 15 in 2010 to about 8.4 in 2025, before recovering to 9.14 in 2030.”

So, what does this mean to you? Temper your expectations that the market will return anytime soon to its glory days of years past.

Joseph “Big Joe” Clark is a certified financial planner. He can be reached at or 640-1524.

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