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I compared the historical stock market chart to the chart for the number of births in the U.S. I checked to see if the market would rise 28 years after a rise in the birthrate and decline 28 years after a decline in the birthrate. There was no correlation.

Then I noticed that the charts looked remarkably similar in one portion. The sharp rise in the number of births in 1932 matched the sharp rise in the stock market beginning in 1982. The charts match when the chart for births is projected 50 years into the future.

Gronbach, Kenneth W. The Age Curve: How To Profit From The Coming Demographic Storm. New York: American Management Association, 2008. Print.

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This makes good sense from an intuitive standpoint. Men and women marry at the ages of 26 and 25, respectively. Child rearing begins when the demographic age of couples is 28. There is an increase in spending at this point but not an increase in investing. Twenty-two years later, the child has grown and left the home. The income that had gone to child rearing can then be invested. By age 50, the reality of having insufficient savings will begin to set in. This gives urgency to investing that a young person, with a longer time horizon to retirement, may not fully appreciate.

The theory paints a bleak picture of the spending pattern in adulthood.

1) Income is diverted to child rearing not long after marriage. The spending persists until the child has left the home. The spending period of 22 years allows for college funding. The time period, which extends beyond the expected 18 years, can also allow for more than one child in the home.

2) Income must then be allotted to retirement savings if the couple is to continue to enjoy the same standard of living.

Exploring the Theory

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Three of the periods did not follow the expected trend. There was one period in the chart for the up markets and two periods in the chart for the down markets.

The downtrend from 1972 to 1974 can be explained by the high living expenses caused by inflation. Inflation reduced the amount of income 50-year-olds could afford to invest.

The uptrend from 1957 to 1959 and the uptrend from 1974 to 1982 were likely caused by something different. There were recessions in these two periods. These are the only two periods that had recessions in the chart for down markets. It seems that recessions reversed the expected direction of change in markets that would have ended down. Recessions accelerate falling prices. It could be that investors then compensate for the twice-caused decline (both a down market and a recession) by swooping in to buy up depressed shares. This would cause prices to soar after a recession and end above the level at the beginning of the period.

Investment Implications

At the outset of this project, I thought that increased demand for goods and services 28 years after a spike in the birthrate might increase profitability among firms. It would be this increase in profitability from higher sales and revenue that would cause share prices to rise.

I have always tried to select the best-managed firms with the best business plans. I knew that demand for stock as an investment vehicle is a factor which drives share prices but thought, as a share is fractional ownership of a company, that prices would be largely determined by a company's ability to be profitable.

Share prices are also determined by demand for stock as an investment vehicle. Shares of stock are bought blindly as components of an index. This also explains why the shares of companies with inept management or subpar business plans can continue to climb even while the profitability of the companies decline. Despite this, the stock of a company which is poorly managed or in a declining industry would still tend to fall further in downturns and recover more slowly in upturns than stock in companies with better fundamentals.

Fifty-year-olds delayed investing by one year in the period that would have run from 2001 to 2007 (it became 2002-2008) and two years in the period that would have run from 1959 to 1963 (it became 1961-1965). The reason for this is, presumably, declines in the stock market during and immediately before the year which would have begun the period. The fear of investing while the market was in decline might have caused fifty-year-olds to delay investing for a short time.

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An earlier paper I have written, which cannot be reviewed here, predicted a recession in 2018. The year 2018 is 28 years after births began to decline in 1990. The idea is that 28 years after a decrease in the birthrate there is also a decrease in heavy spending because fewer households are formed. Reduced spending on household formation means reduced economic activity. Changes in spending also has an effect on inflation (and therefore interest rates) because inflation is a demand-driven phenomenon.

Stock Market

There is an expected downtrend in share prices until 2019 (fifty years after births bottomed in 1969).

There is an expected uptrend in share prices in 2019 and 2020 (fifty years after births increased in 1969 and 1970).

The downtrend is expected to resume in 2021 (fifty years after births began to fall in 1971).

The downtrend is expected to continue until 2023 (fifty years after births bottomed in 1973).

A general uptrend is expected from 2025 to 2040 (covers the span of births from 1975 to 1990).

Bond Market

Interest rates are expected to rise from 2014 to 2018. (28 years after rise in birthrates from 1986 to 1990).

Interest rates are expected to fall from 2018 to 2025. (28 years after a decline in birthrates from 1990 to 1997).

A (bumpy) period of generally rising interest rates is expected from 2025 to 2033. (28 years after a rise in birthrates from 1997 to 2005).

It should be noted that bond yields and prices move inversely. A period of rising interest rates means falling bond prices and a period of falling interest rates means rising bond prices.

Recessions and periods of inflation are triggered by spenders, with a time lag of 28 years.

Stock prices are triggered by savers, with a time lag of 50 years.

Investment Strategy

The trends are unfavorable for both stocks and bonds until the year 2019. The trend for the stock market is favorable (post-recession) in 2019 and 2020. The downward trend in the market resumes in 2021 and lasts until 2023. There is a favorable trend in the bond market from 2018 to 2025. The trend then favors a shift from bonds to stocks in 2025.

The shift from bonds to stocks in 2025 is favorable on the account of both the market for bonds and the stock market. It follows 28 years after birthrates began to rise in 1997 and 50 years after birthrates began to rise in 1975. The time lags indicate rising interest rates (a negative for the bond market) and rising demand for investments (a positive for the stock market).

Source: Investing And The Birthrate: Why The Market Picks Up 50 Years After A Baby Boom