Tuesday, August 23, 2011

The Baby Boom Goes Bust

Will baby boomers be responsible for sluggish stock growth - extending over the next two decades? That's the scenario floated by a paper issued yesterday by economists at the San Francisco branch of the Federal Reserve. Boomers will need to finance their retirement in the coming years, and are expected to do so through a protracted sell-off of their investments.

They don't foresee this causing any sort of crash, but rather a "factor holding down equity valuations over the next two decades." They posit that this is the reverse of something that drove the strong market of the two decades from 1981 to 2000 - investments made, both for retirement and otherwise, during the the prime earning years of people who were born between 1946 and 1964.

That demand, the Fed economists point out, drove price-to-earnings ratios to triple over the course of those two decades. Demographic changes are now likely to drive those same values back down. Let's hope there are some countervailing factors that provide support in the coming decades.

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