The defeat of inflation in the early 1980s underpinned an unprecedented, two-decade bull run. But demography also seems to have been key. Population patterns suggest that the stockmarket growth rates seen in the 1980s and 1990s “are gone for at least a generation”, says Norma Cohen in the FT. People saving for retirement typically invest in stocks, but as they age, they tend to favour bonds and cash in on some of their stocks.
Barclays Capital notes that the 35 to 54 age group is the key age for pension savings and thus equity investment. There is a clear correlation between the size of this age group as a percentage of the British population and the price/earnings (p/e) ratio of the stockmarket. The higher the p/e, the greater the demand for stocks. The percentage of 35 to 54-year-olds bottomed in the early 1980s, then rose steadily and peaked around 2000. P/es followed the ratio up – and have followed it back down as it has fallen back in the past 12 years. So demography appears to play a part in the long bull market.
The trouble now is that, as populations age, the proportion of savers favouring equities is dwindling and the number of retirees or near-retirees favouring bonds over stocks is growing. In Britain, the proportion of 35 to 54-year-olds is set to fall over the next decade. In America, the ratio of middle-aged to older people has slumped since 2000 and is not expected to have recovered by 2050. Demographically speaking, then, says Barclays Capital’s Michael Gavin, “it is very hard to see how you get a replay” of the 1980s and 1990s.