Why The Baby Boomers Could Crash The Market

April 4, 2017

Why The Baby Boomers Could Crash The Market

  • The first baby boomers retired in 2012, but there hasn’t been a significant impact on markets yet.
  • However, in the next two decades the trend isn’t that positive and a Federal Bank of San Francisco model shows the S&P 500 will be at 900 points in 2025.
  • Many factors might mitigate boomers retiring risks, including the timing of their retirement and cashing out, foreign investments, and immigration.


In the 2000s, a strong bearish argument against stocks was that from 2012 onward, baby boomers will start retiring, increasing fund retrievals and pushing stocks down. The argument has faded in the last few years as the current bull market is beating all expectations, but it’s still a good idea to see how baby boomers retiring might influence future market trends.

One of the few truths in the stock markets is to not fight the trend, be it long term or short term. Demographic influences and trends are extremely important because you can’t fight them in the long term. In the short term, the FED can intervene with low interest rates or the government can increase spending, but if the population doesn’t grow, consumption will be severely affected at some point in the future. Before consuming, future retirees have to sell their assets as the income from dividends and bond yields isn’t that high. Let’s see what the implications of this are.

Baby Boomers Retiring

One theory behind the current high stock market valuations and the 20-fold stock market jump in the last 35 years is based on demographics.

Figure 1: The S&P 500 increased more than 20-fold in the last 35 years. Source: Yahoo Finance.

The baby boomer generation has been in their prime earning and investing life cycle since the 1980s. This allowed for high levels of spending and investing that eventually pushed stocks through the roof.

Figure 2: Births have been consistently declining since the end of the 1950s. Source: CNN.

Baby boomers started retiring in 2012, but the market has been rallying since. This silenced the baby boomers retiring argument, but it is a trend that shouldn’t be easily discarded as it can put severe downward pressure on stocks.

A 2011 Federal Bank of San Francisco research letter by Liu and Spiegel shows an extremely strong correlation between demographics and stock market valuations. Stocks go up when there is lots of demand for them. When more people are selling, stocks go down. Every market in the end breaks down to supply and demand. As baby boomers reach their retirement age, it’s more likely that they will start selling stocks, rather than buying. At the moment, the economy is doing fine and the unemployment rate is low, so initial baby boomer sales can be easily absorbed, but what will happen in the next two decades?

Liu and Spiegel first looked at the relation between the price earnings ratio and the ratio of the middle-age cohort, age 40–49, to the old-age cohort, age 60–69, or the M/O ratio. What they found is very impactful as when there are more people in their 40s, stock valuations are high and vice versa.

Figure 3: Price earnings ratios vary in relation to demographic distributions. Source: FRBSF.

Applying the above findings on future age distributions doesn’t lead to a positive outlook for stocks.

Figure 4: FRBSF’s model for U.S. stock valuations based on demographics. Source: FRBSF.

According to the model, we can expect a PE ratio of around 8.4 for the stock market in 2025 and 9 in 2030. If we estimate S&P 500 earnings to grow at the same rate as the economy in the next 10 years, thus 2%, 2025 earnings should be 109.58 (current S&P 500 earnings are 89.9). Attaching a PE ratio of 8.4 to those earnings would result in the S&P 500 dropping to 920.4 points. Ouch!

There are many other factors that can influence stock market prices, but demographics is just another factor that can be added to the list of factors showing how the market is extremely overvalued and risky. It should be clearer to all that we live in an extremely artificial environment due to global low interest rates. As interest rates work like gravity on stock prices, when they are low, stocks surge.

In the short-term, stock prices can deviate from structural trends. Perhaps baby boomers are postponing their stock sales as the stock market is doing so well. However, as people count on their investment money for comfortable retirements, baby boomers selling stocks could be another reason, alongside panic selling from passive investors, that will make the next bear market one of the biggest and steepest in history.

Conclusion & Positive Outlook

I hope I haven’t scared you with the above. To counter a bit, I have to say that baby boomers will be retiring in a 20-year time span. So those born in 1965 are now just 52, making big money and probably investing big in stocks. This postpones downward pressure by at least a few years, if not a decade.

On top of the large time span for the trend, looser global capital regulations have increased foreign fund inflows into U.S. markets, while immigration also helps to fill the gap between the baby boom generation and new generations.

Further, 90% of stocks are held by only 10% of the retirees. This will make steady sales unlikely as dividends and other investments schemes will be sufficient to fund part of their pension requirements. Also, bond yields are still extremely low and therefore, yield oriented retirees might stick to stocks for a longer time. Or, now that interest have started to increase, are we going to see massive selling?

I hope this article makes you think about the position you are in. Doing what everybody else is doing is never a good place to be, or to quote Mark Twain:

“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”

Stocks have surged in the last 30 years because everyone flocked to them and two extreme bear markets weren’t enough to scare people off. You’ve probably made a lot of money on stocks in the last few years, so it might be a good idea to look at what you have in comparison to what you need.

Don’t be greedy and risk losing 62% of your portfolio—which would be the loss if the S&P 500 reaches a price earnings ratio of 9—just because everybody else is doing so. Now is the time to be smart, not greedy and foolish.

Investing Into The Baby Boomers Retiring Trend

Even if retirement selling might put negative pressure on stocks, there will be some companies that will profit enormously from an aging population. Keep reading Investiv Daily as tomorrow we will discuss the healthcare sector.

By Sven Carlin Baby Boomers Investiv Daily Retirement Share: