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Jefferies analysts on Monday resurfaced an old economic theory that an impending wave of baby boomer retirements could trigger a unified move to liquidate equity holdings.
Such a mass exodus, so the theory goes, could entrench the stock market in a “dark period” for years until younger generations save enough to start repurchasing the assets their grandparents sold.
But Jefferies Global Equity Strategist Sean Darby said that the generational shift doesn’t necessarily mean stocks are set for a decade of lackluster performance because foreign investors will fill the void.
“One of the main reasons that investors should not be gloomy about forced selling of retirement plans is that foreign ownership of the US equity market is climbing,” Darby wrote in a note to clients on Tuesday. “The growth of assets under Sovereign Wealth Funds has caused a marked shift towards global equities as capital controls have been relaxed.”
What’s more, it’s not certain boomers will sell stocks and get more conservative with retirees living longer than ever. But there’s no denying the boomers will be market force, it’s just not certain how they will impact the markets. Right now, workers over the age of 55 years represent a near-record 24% of all U.S. employees, according to the BLS.
One such study on the theory that has raised alarm— and the one cited by Darby — comes from Federal Reserve Bank of San Francisco in 2011, which found evidence that U.S. equity values are tied to the age distribution of the population. Such a relationship, the paper concluded, implies that prices could slump until 2025 until millennials start buying back the stocks their parents and grandparents ditched.
“There has been a tight correlation between population dependency ratios … and the P/E ratio of the U.S. stock market,” Fed researchers Zheng Liu and Mark Spiegel wrote. “In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values.”
“Market participants may anticipate that equities will perform poorly in the future, an expectation that can potentially depress current stock prices,” they wrote.
But in addition to a possible uptick in foreign investment, Jefferies believes fears of a decadelong slog for stocks are overblown.
Darby noted that a 2006 Government Accountability Office report showed that macroeconomic and financial factors explained much more the variation in stock returns between 1948 and 2004 despite changes in population age over the 56-year period, the Jefferies strategist wrote.
“The bottom line is that the 2006 GAO study suggests that retiring boomers are not likely to sell financial assets in such a way as to cause a sharp and sudden decline in prices,” the Jefferies strategist wrote.
Instead, increased life expectancy could both smooth and extend retiree asset sales over a longer period, while many may opt to work beyond the traditional retirement age, he added.
