What If Markets Depend on Demographics?

A recent study shows that ageing baby boomers could exert downward pressure on U.S. equity market performance.

Fernando Luque 25 August, 2011 | 5:33PM
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The Federal Reserve Bank of San Francisco (FRBSF) recently published a very interesting study on the relationship between the demographic trends in the United States and equity market performance (find the complete research here).

The research shows that there is a high correlation between the price-earnings ratio (P/E) of U.S.-listed companies (red line on this chart) and the proportion of 40 to 49 year-olds versus the proportion of 60-69 year olds in a population (called in the study the M/O ratio). The study suggests that the ratio between the middle-age population cohort, or citizens accumulating wealth, to the old-age cohort, or citizens spending their wealth in retirement, explains about 61% of changes in P/E ratios in a given period. That is, U.S. equity values are closely related to the age distribution of the population.

See Figure 1: P/E and M/O Ratio Source: FRBSF Economic Letter: "Boomer Retirement: Headwinds for U.S. Equity Markets?" Aug 22, 2011

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Fernando Luque

Fernando Luque  is Senior Financial Editor at Morningstar Spain