As Baby Boomers continue to retire, some analysts expect financial markets to feel the strain. We examine whether demographic shifts truly shape stock and bond returns, or what other factors matter more.
Topics covered include:
- Will retiring baby boomers lead to lower stock prices or higher interest rates
- Some earlier demographic predictions and how they worked out
- How do natural interest rates reflect the demand and supply of capital
- Why demographics are only one factor that determines economic growth and financial market returns
Show Notes
Measuring the Natural Rate of Interest—Federal Reserve Bank of New York
Distribution of Household Wealth in the U.S. since 1989—The Federal Reserve
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 546. It’s titled “Do Retiring Baby Boomers Actually Move Markets? And How Much Do Demographics Really Matter?”
Baby Boomers and Private Capital
Recently, I got an email from a member of Money for the Rest of Us Plus. He’d been listening to a podcast by strategist Peter Zeihan. Peter says his work intersects geography, demography, and energy. And in this podcast, he was describing what he says is a much bigger problem that’s going on with capital supplies. He contends that most private capital—capital being monetary assets that are invested in corporate projects, such as the AI data center buildout. He says most of it comes from people in their 50s and early 60s, after their kids have moved out and they start massively saving for their retirement.
Now, he suggests it’s 70% of total private capital. That seems high to me. But what he’s worried about now is that now that 80% of America’s baby boomers are retired, they will become more conservative in their investing and move much of those savings from stocks to bonds. And that could potentially move markets.
This member had some questions regarding the potential impact of the savings that the baby boomers were doing, and then the dissavings they’ll do, and particularly how it could have impacted a variety of asset classes, including corporate bonds, non-investment-grade bonds, where the incremental yield or spread is very, very narrow, and whether that savings action contributed to that. We’ll address that. But first, I want to talk about the whole idea of using demographic trends to make investment predictions.
Demographics and Investing
I first became aware of this approach back in 1999. At the time, I was on our executive committee at my institutional advisory firm—or as a partner—FEG Advisors, and we were in the process of selling the firm to allow the founders to exit.
And so we had investment bankers that we used, and we were meeting with potential suitors, and one of them was down in Texas, Mutuals.com. This was a venture-backed company, and their chief strategist or advisor was Harry Dent Jr. We went down and met with him. I think Harry called in for a conference call while we were meeting with this entity, and we did not enter into a merger with them. But Dent is a demographic forecaster and has written numerous books.
He believes that demographic data can identify macro and micro trends, and he uses these longer-term trends, 46-year cycles that’s tied to the birth index, to forecast what’s going to happen with the stock market, with inflation, deflation, booms and busts. His first breakout book was The Great Boom Ahead. It came out in 1993, and he predicted accurately the stock market boom of the 1990s.
In 1999, his book was The Roaring 2000s, and this was probably what he talked about in our discussion when we were meeting with Mutuals.com; I just don’t remember. But I remember him, and I remember the demographic approach, which was intriguing to me. So I have followed his work for decades, and my takeaway is it’s really difficult to make investment predictions using demographic trends. That book, The Roaring 2000s—he believed that by 2008, the Dow Jones, U.S. stocks, would soar to 21,500, and perhaps as high as 35,000 by the year 2008, nine years later. At the time, the Dow was selling for 11,000. That was the prediction among many others, but a number like that stuck in my head, and it didn’t quite work out. The Dow reached 14,000 in 2008, so 7,000 points lower, about 2.7% price appreciation. It definitely was not a stock market boom, but there was a housing bubble during that period.
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