Here's something that occurred to me a while back. I've asked a few people about it, and been stared at like I'm some sort of loon, but the logic is sound and nobody's ever come up with a specific objection to the scenario. Let me run it by all of you and see if anyone has any thoughts on the topic...

Everyone's familiar with the "baby boom" demographic bulge. But as the leading edge of the baby boomers are approaching retirement, what's the effect of this demographic bulge on the stock market?

One of the distinguishing features of the last twenty years of personal savings and retirement savings is the shift from company-funded pensions to individual retirement accounts. The individual is much, much more likely to hold stocks these days, and a larger proportion of them relative to their total savings than in yesteryear. (People once held significant portions of their savings in CDs and bonds, rather than stocks.) This suggests, at least to me, an increase in the total amount invested in the stock market.

It's also true that the average gain in the stock market is significantly above the rate of growth as the economy as a whole. This suggests that the growing economy, and increases in efficiency and productivity, cannot account for the entire growth of the value of the stock market. (Bigger than growth plus inflation, for that matter.)

Here's a plausible scenario for why this would be the case. Changes to tax laws, as well as the economic problems of paying pensions in an age of uncertain length of survivorship, have made corporations favor individual retirement accounts over defined-benefit pensions. These accounts generally favor stock investment; in fact, even though you still hear about making sure your portfolio is diverse, many people have their entire retirement savings invested in stocks. This shift of money into stocks and away from more traditional retirement savings vehicles would represent an increase in the demand for stocks - i.e., all other factors remaining equal, the prices of stocks would tend to rise in order to reflect increased demand for those stocks.

Am I missing something obvious here? SHOULDN'T that be the result of additional money chasing the same pool of stocks? Doesn't that explain the increase in acceptable price-to-earnings ratios from my childhood to the present day? (When I first learned stocks, a P/E of 13 was considered average; good luck finding one with that ratio these days!)

But if that's the case, then the precise opposite effect will take place when the boomer boom edges into retirement age. You can't eat your stock certificates, so instead of saving additional money for retirement, the boomers will start to sell their stocks instead. There won't be more an equivalent increase in the amount that the younger-than-boomers are saving, even if we accept that young people save at the same rate, simply because there will be more boomers retiring than young people entering the market. Additionally, wise boomers will be moving to reduce their exposure to the stock market as they approach retirement.

Less money floating into the market combined with increase money flowing out of it suggests that the general price level of stocks will then fall. But at that point, you've got a lot of boomers on the edge of retirement, with most of their portfolios in stocks, and stocks are suddenly falling in value... so more of them are going to sell, and earlier, in an effort to preserve retirement savings that they can't afford to lose. At this point you have the makings of a full-blown crash, no? The lower that value goes, the more desperate that approaching retirees will be to get the hell out of the market altogether. And you can't even hope that it's a temporary correction, because at the end of the day, not all the money that's invested will be returning to the market - it has to come out because retiring boomers can't eat stock certificates or pay their mortgage with them, and because the smaller number of younger-than-boomers won't be enough to keep up the incoming flow (to say nothing of not wanting to ride to the bottom themselves, heh!)

Where's the problem here? I'm pretty darned smart - the title of this blog is not entirely a joke, guys - but I can't be the only one to have considered this topic. At the same time, I can't find any other discussions of the issue. Am I missing something so fundamental that it's just a really stupid thing to consider? Or is nobody talking about it because nobody's thought about it? Or - scary thought - is nobody talking about it because everybody knows it's coming and nobody wants to be the one to spook the market first? Oy...

Posted by: Avatar_exADV at 09:52 PM | Comments (3) | Add Comment
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