Just as stocks are struggling to recover from the financial crisis, they face another long-term headwind. US equity valuations “have been closely related to demographic trends in the past half century”, say Zheng Liu and Mark Spiegel of Federal Reserve Bank of San Francisco.
The trouble is that the baby-boomers (born between 1946 and 1964) are now starting to retire. They reached their peak working and saving ages between 1981 and 2000, helping to fuel a record bull market by investing in shares. But now they’re likely to sell them to finance their retirement.
That will hamper valuations and prices. Based on the past relationship between equities and demographics, the authors estimate the price/earnings (p/e) ratio of the US stockmarket will decline from 15 in 2010 to around eight in 2025. Assuming earnings continue to expand by their long-term annual average (an annual inflation-adjusted average of 3.4%), the fall in the p/e ratio implies ageing baby-boomers could cause a stock-price decline of 13% in real terms over the next ten years.