You Should Stop Chasing a Stock Market Return: Baby Boomers Prepare to Blast the Market

 In Bond Investing, Personal Finance

Stock Market

You think you know how the stock market works. That gives you the ability to get in and make a killing through savvy investments. The chances are good that you really only have part of the picture, though.

And, that missing piece of the puzzle might just turn your investment success into dramatic failure.

If you’re currently playing the market, chasing that big return, it’s time to give your investment strategy a second look, because Baby Boomers are about to kill it.
Bond Investing Fundamentals

The Baby Boomer Effect on the Stock Market

The stock market works on supply and demand, just like any other market. The more demand, the higher the market surges. If you look at the trend of stock market growth in comparison to population growth, you’ll find that it mirrors the life cycle of the Baby Boomer generation.

So, what’s the problem here? The issue is this – what happens to the market when the largest generation ever finally gets out of it?

The answer is a huge bust.

Jesse Felder points out the correlation between the stock market and demographics.  The Federal Reserve Bank of San Francisco also points out that the increasing number of Baby Boomers retiring is changing the structure of things, and might be giving US equity markets a huge bump as they diversify their holdings.

A lot of research has been done here that proves there’s a direct correlation between the size of the generation currently within its peak earning zone and investment period and the stock market valuation during that time.

The more demand there is for investment options in the market, the higher the valuation climbs. Witness the fact that when the Baby Boomer generation hit its peak earning and investment stage (from 1981 to 2000), the market also hit its peak, with massive valuations that were unheard of previously.

Now, compare that to the fact that after this period, the market plunged. While it has since recovered, there’s a glaring issue here.

In order for the stock market to continue at its current pace, the incoming generation needs to be the same size as the outgoing generation. Of course, Gen X is nowhere near the size of the Baby Boomer generation, and don’t look for help from the Millennials or Generation Z, either.

Neither of those even comes close. In fact, Gen X will mark a massive decline in both demographic numbers and stock market performance.

Why the Sea Level Change?

So, let’s assume that you accept the explanation that market valuation is tied strongly to the size of the current generation enjoying their income and investment peak. Why might things change? Why would Baby Boomers pull their money out of the stock market? Actually, it makes a lot of sense.

Imagine yourself in their shoes. You’re approaching, or even beyond the age of 65 now. You’ve either retired or are about to retire. In order to ensure that you have money for your golden years, you have to put your funds in some other place.

Stocks are just too risky. Now, spread that effect out – a lot. Since 2010, there have been 10,000 people per day hitting retirement age. Now, imagine if every one of those people pulled their money out of the stock market the day they turned 65 and instead put it into something a little less volatile.

The result? Chaos.

Current research points to the fact that we’re looking at a 50% market decline over the next 10 years or so. Ned Davis, the author of Being Right or Making Money, also backs up these findings, as does Cliff Asness.

What does that mean for the current sky-high stock market valuations? Simply put, don’t expect them to stick around. Things are going to start crashing, and it’s going to happen quickly. You need to be prepared for that well before it happens.

It’s time to get out of the stock market and stop chasing those returns.

Even the most conservative estimates show a decline of 13% between 2010 and 2021 when the stock market will reach its lowest point. The climb back up will be long and slow, and it will never again hit the same highs simply because there will never be a single generation with enough people in it to match the Baby Boomers.

Complicating Factors

It might be tempting to think that it’s all doom and gloom for the stock market. That might not be the case. The decline is predictable, so safeguarding your wealth is simpler.

However, there’s also the influence of foreign investors to consider. China’s population is booming, and they’re looking farther and farther afield for a place to invest their wealth.

China is also considering relaxing their capital controls, which would give nationals the chance to put their money into a wide range of other options, fostering significant growth, although it remains to be seen if that growth would mirror the massive boom we’ve experienced.

Other nations are in the same situation – the US stock market might not plunge to rock bottom thanks to the combination of foreign investments and the mix of Gen X and Millennials.

When everything is said and done, now is not the time to be seduced by super high market valuations. Those inflated values will not be around for long, and all the signs point to a long, slow descent of the stock market.

It’s better to invest wisely with options that will hedge you against market devaluation.
Bond Investing Fundamentals

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
Recommended Posts