Are Stocks Doomed by Demographics?

Photograph by Ann Summa

The stock market got a big boost on Sept. 13 when the Federal Reserve announced it would be pumping money into the financial system for as long as it takes to lift the economy. But what if the Fed is up against a force that’s stronger than money—demographics?

Last week I came across a gloomy analysis on the aging of America’s impact on the economy. Then I found strategists who are using demographics to make a bullish case. Here are the details.

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.”

Would the gentleman like Prozac gravy with that hunk of cold turkey?

Dent tracks a 46-year leading indicator that he says identifies a predictable peak in spending of the average household. He notes the Baby Boom birth index started to rise in 1937 and continued its ascent until 1961 before it fell. The result: “Add 46 to 1937, and you get a boom that starts in 1983. Add 46 to 61, and you get a boom that ends in 2007.”

And you know how marvelous things have been since 2007. Dent’s argumentative upshot: Painful, chronic deflation is here for quite some time. And there’s not much anyone can do about it. Lest you attempt to look for demographic silver linings, he urges, “Don’t hold your breath for the Echo Boomer generation.” That would be the group born between the early 1980s and mid-’90s.

Well, Tobias Levkovich, Citi’s chief U.S. equity strategist, put out a note this week that enthused about that very cohort. It got picked up by Bloomberg charts whiz Dave Wilson and by Josh Brown’s Reformed Broker blog. Levkovich posits that demographics are about to shift in favor of equities for the first time since the 1990s. Saving and investing by the Echo Boomers, writes Levkovich, “would generate a new set of equity fund inflows.” Levkovich plotted a century-long chart of the number of people aged 35 to 39 and found that it tracked fairly well against stock prices. That relationship suggests a coming spike in stocks as Echo Boomers reach that potent age level. This age group is on the verge of increasing for the next 17 years.

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.)”

Meanwhile, at the intersection of these two world views is the lesson of the past four years: The stock market can inflate in a broadly deflationary economy.

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