There have been lots of predictions that the surge in baby boomer retirements will have a substantial negative impact on the stock market. The theory is that when we retire, we will sell our extensive stock holdings to (a) reduce risk and (b) generate a more stable retirement income. More recently, some economists at the Federal Reserve Bank of San Francisco performed some detailed analysis of the baby boomer retirement effect and made their own predictions. You should definitely read it.
The analysis includes this conclusion:
This evidence suggests that U.S. equity values are closely related to the age distribution of the population. Since demographic trends are largely predictable, we can forecast the path that the P/E ratio is likely to follow in the next few decades based on the predicted M/O ratio.
Thus, the predictions are that:
- We are in a 15 year bear market for stocks. (Ouch)
- The P/E ratios for stocks will decline from around 15 (2010 average) to 8.3 in 2025.
The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027.
If these economists and their modeling are correct, we can expect more than a “lost decade” (which began at least as early as 2008). No, they say, we can expect a lost two decades, with recovery to 2010 levels not expected until 2027! Indeed, stock values will generally decline over the next decade, with recovery beginning in 2022.
I hope this analysis is wrong but I will continue to take steps to protect our retirement based on the assumption that this analysis could be right.
Here are some links for you to pursue your own reading on this topic:
The actual Fed research report.
An article in the Wall Street Journal about the Fed report.
Commentary from Business Insider: Fed Economists Predict A 15 Year Bear Market For Stocks.
A Bloomberg article and interview of a Fed economist who authored the report.
After you read this material, I would be interested in your commentary and feedback, including any steps you are taking to protect your retirement if these predictions turn out to be accurate.