Boom, Sweet Sweet Cash Money Baby.... Straight in My Paypal

In example you're at a shortage of miserable news stories, here'south something else to worry about. According to a contempo Federal Reserve paper, retiring babe boomers could sink the stock market over the coming decades.

Infant boomers are, of course, a large generation. And when that large grouping begins retiring en masse, they volition liquidate assets. All that selling, the Fed reckons, will go along stock valuations low for the next two decades.

Past a lot, too. "We find that the ... P/E ratio should turn down from about 15 in 2010 to about viii.three in 2025 before recovering to nigh nine in 2030," the Fed writes.

That's serious stuff. To state the obvious, if earnings double, nonetheless the earnings multiple falls past half, stocks go nowhere.

The Fed's analysis is based on taking the ratio of two groups, the middle-historic period (40-49) and old-age (threescore-69) cohorts, and comparing it to the P/East ratio of the Southward&P 500. Over fourth dimension, it found a connectedness:

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Source: Federal Reserve.

And concludes:

[B]etween 1981 and 2000, as babe boomers reached their superlative working and saving ages, the M/O ratio increased from about 0.xviii to about 0.74. During the same period, the P/E ratio tripled from about 8 to 24. In the 2000s, as the baby boom generation started aging and the baby bust generation started to achieve prime working and saving ages, the Grand/O and P/East ratios both declined substantially.

Extrapolating that tendency out over the adjacent 2 decades, and factoring in projected changes in age demographics, is how the Fed forecasts the drop in P/E ratios.

Scary stuff. But should yous buy it?

I think in that location are ii reasons to exist skeptical.

Earlier we become there, there'due south an important bespeak to make. At that place seems to exist a notion that baby boomers depressing stock values is a disservice to younger generations. It's quite the reverse. If the Fed is right, information technology'southward the baby boomers who will suffer. Just those in the selling phase of their investment lifecycle should want loftier stock prices. Over the adjacent 20 years, that'south the baby boomers. Younger generations in the accumulation stage should dear lower valuations.

But the Fed may very well be wrong.

First, its forecast rests on the fact that stock valuations were low in the 1980s, rising in the 1990s, and dropping in the 2000s -- and that changes in age demographics fit those time periods nicely. Merely regardless of what its models say, it seems a bit rich to say this was causation, rather than random correlation.

Above all else, stock valuations were low in the early 1980s considering short-term involvement rates were in the double digits. It didn't make sense to pay 10 times earnings for a stock when you could earn 15% in a coin market account. And valuations were high in the 1990s because of a momentary lapse of sanity. Dot-com stocks didn't trade at a zillion times acquirement considering baby boomers were in their prime earning years; they traded that high because the world was stuck in a this-time-is-dissimilar mindset that pervades all bubbles. Declining valuations over the past ten years have been a correction of that bubble. All of those events could have -- and probable would have -- played out regardless of demographics.

More broadly, the question of who baby boomers will sell their retirement assets to can, I think, exist answered simply: the younger generations.

The baby boom generation is associated with beingness huge considering it's considerably larger than generations earlier it. But those baby boomers had kids. Lots of them. There are now millions more than Americans betwixt age 20 and 35 than historic period l and 65. Broken out past generation, the U.S. has a fairly young population:

Historic period Accomplice	Number of Americans (2010)	Percentage of Full Population
<twenty	83.2 million	27%
20-45	102.7 1000000	34%
45-70	91.viii one thousand thousand	thirty%
>seventy	26.vi million	nine%

Source: Census Bureau.

This is hardly the face of a demographic time bomb. Far more Americans will exist entering their prime earning years than will be entering retirement over the next two decades.

Compare that to Nihon, a country with a legitimate demographic nightmare:

Historic period Accomplice	Number of Japanese (2009)	Percent of Full Population
<20	23.5 million	eighteen%
xx-45	forty.one million	31%
45-70	42.3 meg	33%
>lxx	21.half dozen million	17%

Source: Demography Bureau'southward International Information Base of operations.

And there'south reason to think that today's younger generation will actually exist more stock-oriented than their boomer parents. For older generations, the primal road to retirement is a pension and Social Security. For younger generations, it's a 401(g) and a belief that Social Security will be gutted by the time they're eligible. The latter group will be far more dependent on private savings and -- chiefly -- investment returns (pensions also invest in stocks, but a big part of current pension benefits are funded through upper-case letter injections).

Younger generations are already heading that manner. Consider the new tendency in automatic 401(k) enrollment, in which new employees are automatically pushed into a retirement plan, but tin can opt out if desired. In 2005, 5% of businesses used automatic enrollment. Today, 38% do. Non simply are there more than younger Americans than infant boomers, just that younger group may end up putting a larger percentage of their income into retirement assets. This once more might help answer the question of who volition buy baby boomers' stocks: their kids.

Mayhap the Fed is correct. Every bit a member of the younger generation who will be accumulating stocks in the coming decades, I hope they are. Only similar near predictions of doom, it should be viewed with a level of skepticism. The future is normally better than the past. No reason to think that's changed.

Bank check back every Tuesday and Friday for Morgan Housel'southward columns on finance and economics.

At the time thisarticle was published Fool contributor Morgan Housel doesn't ain shares in whatsoever of the companies mentioned in this article. Follow him on Twitter @ TMFHousel . Endeavor any of our Foolish newsletter services free for thirty days . We Fools may not all hold the aforementioned opinions, but nosotros all believe that considering a diverse range of insights makes united states better investors. The Motley Fool has a disclosure policy .

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Source: https://www.yahoo.com/now/2011-08-26-baby-boomers-the-biggest-threat-to-your-investment.html

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