An old economic theory resurfaced recently that stated an inevitable wave of baby boomers entering retirement could trigger a colossal shift to liquefying equity holdings.
The theory examples that such a massive exodus could plunge the stock market into a dark period for many years until younger generations can save enough funds to begin repurchasing the assets their grandparents sold.
Sean Darby, Jefferies Global Equity Strategist, explained that the generational shift does not necessarily spell out disaster for stocks due to foreign investors being able to plug that hole. Furthermore, foreign ownership of the United States equity market is growing, and investors should not be upset about being forced to sell retirement plans. The increases of assets under Sovereign Wealth Funds has created a significant shift towards global equities as capital controls have calmed down recently.
There is no denying that baby boomers will be the leading market force. What is not certain is how it will impact the markets. Additionally, it is not for sure that baby boomers will sell stocks or become more conservative due to retirees living longer than ever before. According to the BLS, currently, workers over the age of 55 years old represent approximately 24% of all U.S. employees.
A study cited by Darby that raises some alarms is from 2011 by the Federal Reserve Bank of San Francisco, which reported evidence that the U.S. equity values are tied to age dispersion throughout the population. The paper concluded that such a relationship could cause prices to slump until 2025, which is approximately around the time that millennials will be able to start buying back the stocks their grandparents and parents sold.
Federal researchers Mark Spiegel and Zheng Liu said, there is a significant correlation between the P/E ratio of the U.S. stock market and dependency ratios. This correlation foreshadows poor equity values in the context of the inevitable retirement of baby boomers over the next two decades. Participants of the stock market can expect that equities may do poorly in the future, which can potentially lower current stock prices.
The Jefferies strategist believes that the fears regarding a decade long depression of stocks is overdramatic as well as a possible increase in foreign investment.
Darby pointed out that a report from 2006 called the government Accountability Office report showed that financial factors and macroeconomics explained the variations in stock returns between 1948 to 2004 despite changes in the age of the population over the 56-year timeframe. He concluded that the 2006 study showed that retiring baby boomers are not likely to sell financial assets in a way that will cause an economic downturn in stock prices. Furthermore, greater life expectancy could extend retire asset sales over a greater period of time, even though numerous people may pick to continue working beyond the typical retirement age.