Harry S. Dent | Monday, September 02, 2013 >>
A couple of weeks ago, one of my long-time followers, Calvin, emailed me the following:
“I have been a follower of yours since the ’90s and I’m a firm believer of demographic trending. Just recently I came across a different twist on this trending in an article written by Alejandra Grindal. She follows the demographic M-Y ratio, which is the proportion of middle-aged individuals (M) to young people (Y).
“She makes a bold assumption that middle-aged individuals, as they approach retirement, will divert more towards retirement savings and thus into the stock market via 401Ks, IRAs. I believe, Harry, that you hold the opposite view. Care to comment?”
When I saw this, I shook my head in irritation. Not at Calvin. His question is an important one and I thank him for asking it. But at people like Grindal…
You see, she’s making the classic argument I get from analysts and economists who apply demographic trends without fully understanding them. “Aging Baby Boomers are going to drive up the stock market as they save for retirement and invest more money in the stocks,” they say.
I say: “REALLY!?”
Older people… who don’t buy bigger homes, but downsize instead… who drive their cars less miles each year, so buy new cars less often… who spend less on raising their kids and their expensive educations… who even eat less, not to mention not having to feed their kids anymore…
THESE people are going to cause the stock markets to go up?
I don’t think so!
Just think about it…
Americans spend the most money when they’re about 46 years old. That means Baby Boomers moved past their peak spending cycle in 2007.
What is the largest sector of spending in the U.S. economy? Real estate and all the sectors that drive that!
And when do people spend the most on buying homes? Between the ages of 27 and 41.
Is the Baby Boom done with that industry? Yes!
In fact, even the younger generation isn’t as enamored with real estate as the Boomers were. After the bubble burst, Echo Boomers and Millennials were more interested in freedom of movement than cementing themselves to one place with a mortgage.
I will give Grindal one point. People DO invest more as they age, a trend we see typically between the ages of 46 and 64, before they start spending down their savings. But the rate of such investment peaks around age 54, and as we get closer to retirement, we invest more in bonds and fixed income than stocks. We become more risk-averse.
The peak numbers of Baby Boomers were born between 1957 and 1961. Their stock buying peaks between 2011 and 2015. That doesn’t sound good for a theory that stocks will go up and up in the next decade, especially when demographic trends in spending and earnings point down from 2008 into 2020 to 2023, before turning up again.
The truth, from my in-depth analysis over 30 years, is that the stock market correlates with one major trend: earnings. Earnings grow more with GDP, not with higher or lower levels of investment demand. They grow with consumers buying the products out there, not with share purchases.
Just look at the Bob Hope generation’s experience. Their peak-investment years were during the 1970s into the mid-1980s, yet markets were mostly down? That’s because stocks most correlate with the Spending Wave. See for yourself…
So to answer your question, Calvin, while Grindal isn’t completely wrong, she knows just enough to be dangerous.
Don’t listen to people who only half understand demographics. Listen to us.
P.S. Our Spending Wave is one our most powerful tools, which is why we’ve used it to develop demand curves for hundreds of products and services Baby Boomers WILL consume as they continue to march into old age. I’m talking about knowing what these people will buy and when. That kind of information is like money in the bank. Now, you can access it for yourself. Start here.
Ahead of the Curve with Adam O’Dell
To Harry’s point – the stock market correlates with earnings – I’ve found a great chart to share with you today.
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