A New Golden Age Of Demographic Growth

by: Cam Hui, CFA

Back in 2011, I wrote about how US age demographics was likely to drive a new secular bull market at the end of this decade (see Wait 8 years for a new bull?). I cited research from a team of academics led by John Geanakoplos who wrote a paper entitled Demography and the Long-Run Predictability of the Stock Market. I wrote:

In this study, Geanakoplos et al related demography to long-term stock returns. They found that P/E ratios were correlated to the ratio of middle-aged people to young adults, otherwise known as the MY ratio. When MY rises, the market P/E will tend to rise and when it falls, P/Es tend to fall.

If the conclusions of the study are correct, then we should see a continued fall in P/E ratios with a long-term bottom in stock prices forming about 2018, or eight years from now.

In 2012, I followed up with a post about a San Francisco Fed study entitled Boomer Retirement: Headwinds for U.S. Equity Markets? The SF Fed researchers used a slightly different methodology than the paper by Geanakoplos et al, and they postulated a market bottom in 2021 (see A stock market bottom at the end of this decade).

Now I see that Bill McBride of Calculate Risk has approached this issue of demographics in a slightly different fashion but coming to a similar conclusion. He is calling for a boom in housing at the end of this decade (via Business Insider):

McBride argues that currently, with so many 20-24 year olds, the demographics are very favorable to apartment renting. And so of course these days, the multi-family housing sector has been leading the way. And you hear all these stories about how people aren't into homeownership anymore. But the demographics that are currently favorable to apartments will turn into demographics favorable to homeownership, as the cohort gets older, moves into higher paying jobs, and wants more space for those new babies.

Bottom line: As the Echo Boomers age, they get more affluent, start to have babies and they will drive a bull market in housing, as well as the stock market. It's nice to get confirmation of my demographically driven analysis from an well-respected source.

Disclaimer: The opinions and any recommendations expressed in this blog are solely those of the author. None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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