Why is the aging population in the United States a problem with stocks

Why is the aging population in the United States a problem with stocks – Your retirement

Demography is not fate – but it is important whether you are retired for ten years or more. – Gate Image

A reliable indicator of investor behavior suggests that stock valuations in developed markets will peak over the next decade or so before starting to decline over the long term.

The measurement of this forecast is demographic – in this case, the aging of the United States and other developed markets.

If you are a short-term focused investor, demographic trends are not too worried. However, if you spend a decade or more from retirement and try to develop a proper financial planning strategy for your non-working year, demographics become very important.

The researchers found that the ratio of middle-aged population to older people in a country is highly correlated with the long-term cycle of the stock market.

The following figure plots this ratio in the figure below (called “m/o ratio” or “medium ratio” among demographers). It is calculated by dividing the number of 40-49 by the number of 60-69. (The M/O ratio data in the chart are from Alejandra Grindal, chief economist at Ned Davis Research.)

There is a clear link between the long-term trend changes in M/O ratio and the S&P 500 SPX. For example, the ratio peaked in 2000, which coincided with the early end of the 1990s and the top of the Internet bubble. The ratio then fell for more than a decade, which coincides with the global financial crisis and the 2008-09 bear market. The ratio has been on an upward trend since the mid-2010s.

Relevance is not perfect. For example, the M/O ratio did not reach its lowest point until a few years after the financial crisis. Furthermore, this ratio does not help in predicting shorter bear markets, such as the 2022 bear market.

However, according to John Geanakoplos, an economics professor at Yale University, the correlation between M/O ratios and long-term cycles is impressive, and perhaps the co-author of the seminal academic paper on the topic was also published in 2002. He found demographic evidence that demographics provide a “single explanation” for “single explanation” in an attempt to communicate for 20 years of Boom and World tab aft World tar World World World war ii war ii war ii war ii.

Note that Geanakoplos' research focuses on the relative size of the same population as different populations, rather than the size of the entire population of a country. This is important because as Wall Street predicts the future of the world, many people focus on the overall population.

The chart also shows the path to the M/O ratio that will extend the 2050s until the mid-2030s (although never reached the top level of the Internet bubble), and then until 2050.

Explaining this, Geanakoplos said it is important to focus on the trends of the ratio and its absolute level. He said in an email that the data indicated that “the demographic effect (will be slightly smaller) was slightly smaller, but (as the stock market growth slowed down in the early 1930s (20s) and 1930s.”

You should plan accordingly in your retirement portfolio. Since population forecasts are not accurate, this analysis suggests that over the next decade, you need to start reducing equity exposure to lower levels than suggested by the traditional GLIDE path used by target date funds and financial planners.

For example, when you reach 65, the gliding path Vanguard’s target date fund takes indicates that you should use 30% of your retirement portfolio for U.S. stocks. Demographic orders at the time will expose you to stocks.

Vanguard Glide Path also asked 65-year-old investors to allocate 20% to non-U.S. stocks. Whether you insist on distribution depends on the world and the region of the world. According to the World Bank

According to the World Bank's forecast, many emerging market countries in Africa and Asia will have higher m/o ratios within 25 years. So if you follow population forecasts, you will want to transfer some money from U.S. stocks and overweight emerging markets.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert ratings track investment newsletters that pay a fixed fee for review. He can get in touch

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