Enviable Demographics And The Baby Boomer Retirement Myth

| About: SPDR S&P (SPY)

Being at the tail end of the great Baby Boomer generation, and having 17 nieces and nephews sometimes has me feeling caught in the middle. It is a place I'm not uncomfortable in at all, considering I was the middle kid in a family of seven. It also gives me insight into how our world evolves beyond my professional interests. For example I marvel at how my brothers and sisters have managed to put all their kids through private schools on their teacher and cop salaries. That accomplishment alone dwarfs the U.S. debt issue in my world. As do some of the accomplishments of the young people I meet today.

Last summer my wife and I met a young couple from the Chicago area while on vacation. Both worked full time, both put the maximum contributions into their 401K plans, and had no plans for children for several years. The husband was an engineer for an energy company, and the wife was a recruiter for a prominent insurance company. Both had very little student loan debt because they had both received money from scholarships. It was August of last year and the stock market had just taken a mighty wallop, so I asked the two if they were concerned about that. "Oh no", said the man, his wife nodding in agreement, "We're in it for the long haul. If anything we hope it keeps dropping so we can keep dollar cost averaging." I marveled at that response because when I was his age - 25 -- I doubt I made more in a month than his monthly 401K contribution alone, and I sure didn't have the foresight and planning to put such a large percentage of my earnings into an investment/retirement plan on a regular basis.

For the past several years I have been noticing how there are far more young people surrounding me on the downtown streets, and in the elevators than I had ever remembered. At first I thought it was me getting older - I was right - but it was more than that. The streets in my neighborhood, and the office buildings across the river, were getting more and more crowded and it wasn't by grey haired people like me. I just assumed everyone in my age group had retreated to the suburbs. Then one day a junk e-mail caught my eye. It was a warning that the U.S. economy was about to collapse, for among other reasons poor demographics. Now I know from many years as a market strategist that people's environments can color their perception. And I thought to myself that whoever wrote that scary e-mail does not live in downtown Chicago and have 17 nieces and nephews, because there was no shortage of young people getting paychecks every two weeks in my world. I also know that U.S. demographics aren't bad at all compared to most other developed countries. - see Figure 1. In fact compared to countries like Canada, Germany - Figure 2 -- Great Britain, Japan, and even China the U.S. population pyramid is enviable.

click to enlarge

Figure 1

A population pyramid is a simple graphic which highlights the age groups as a percentage of the whole for different countries. These are significant for investors because we can see if a country is "top-heavy' or not, meaning are there enough younger people behind the older people to absorb that natural down-sizing that we do as we age. For example the closer we get to retirement we may want to roll out of riskier stocks and into fixed income securities. Older folks also don't need such a large house -- the less stairs the better - so they need younger people to buy their larger home in the better school district so they can get a more modest home in a more quiet neighborhood.

Figure 2

Even more important for economies and global stock markets are the populations at the lower rungs. While a healthy investment class is a good thing - think 30 and 40 year olds - even more important from a consumption aspect is the size of the 20 and 25 year old groups. We can see in the U.S. population pyramid in Figure 1, the largest percentage of the U.S. population today is 20 to 25 year old males. As you can imagine a 24 year old is going to spend a lot more money out on the town per month than a 54 year old. The German population pyramid in Figure 2 however doesn't look so good from a consumption standpoint. The German population, like the rest of Europe, the U.K., Canada, Japan and even China doesn't have nearly as attractive a demographic as the U.S. Germany, like many global players, has a strong investment class, but a smaller consumer class. The implications of this have favored the U.S. economy and stock market, and will likely continue to have a pronounced effect on global stock indices going forward. In Figure 3 we see the U.S. S&P 500 chart in the top panel, and Euro's leading - or should we say lagging - Stoxx 50 blue-chip index in the bottom panel.

Figure 3

Demographics are in my estimation the most important determinant to economics, but, let's not forget interest-rates and the weak dollar it created, and how that helped the companies in the S&P 500 increase their global footprint. That the Greenback is still plenty cheap by historic standards is probably the second most important price determinant going forward, and the pricing advantage that a cheap currency lends U.S. companies, even if the dollar is gradually turning higher, would be something that would be more likely to favor U.S. indices. I think it's is very important to know why price is where it is, and very dangerous to ever argue with that. The question for the educated trader is not what will happen for global stock indices going forward, but which market would we buy a dip in, and/or which market would we sell a rally in? I'd say the current trends in place in Figure 3 say it all. Buy dips in the U.S. and sell rallies in Euroland.

As for the big worry of an avalanche of U.S. citizens all hitting the age of 65, and trying to downsize all at once, causing the economy to collapse, just look at Figure 1, and realize the real story may be the wave of twenty-somethings flooding into the down-town areas of major U.S. cities on their way to work everyday. And the next time you see some young whippersnappers carrying on in your favorite restaurant or watering hole as if they have no worries, realize they probably don't. Perhaps FDR was right all along when he said the only thing we have to fear is fear itself. I still prefer to buy dips and sell rallies over dollar cost averaging.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.