The U.S. stock market will be depressed for the next 20 years, thanks to the baby boomers (born between 1946 and 1964) who retire and sell off their stocks, reports Bloomberg. The need to sell their investments in order to fund a retirement without adequate Social Security compensation will lead to a collapse, according to research data compiled by the Federal Reserve Bank of San Francisco.
US stock market still reeling from financial crisis
Considering that the recession still has the U.S. stock market on relatively precarious ground, the retirement of waves of baby boomers couldn’t come at a worse time for the nation. As stock market values are tied to demographic trends, this major change will reportedly drive equity values available to owners and shareholders down significantly, said Federal Reserve study co-authors Zheng Liu and Mark Spiegel.
From 1981 to 2000, baby boomers were at the peak of their working ages. As such, equity-price-to-earnings tripled. Since 2000, however, there has been a large decline. Some hope that overseas demand for U.S. stock will help stave off the effect of retiring baby boomers, but many analysts believe the assistance will only be minimal.
Spiegel, the vice president of the Federal Reserve Bank of San Francisco’s research department, told Bloomberg that Eurasia is experiencing a similar problem, save for within China’s emerging market, where citizens experience financial controls that make heavier investment in the U.S. stock market possible.
S&P 500 has dropped since 2007
Since 2007, Standard & Poor’s 500 has dropped by nearly 28 percent since October 2007, including an 11 percent drop in this year alone. While this is frightening to many economists, Dr. Jeremy Siegel of the University of Pennsylvania’s Wharton School believes that outside demand from developing countries should be enough to weather a baby boomer sell-off. The economies of China and India will have to continue to expand by at least 4 percent annually for that to work, however.
Siegel, author of the 1994 book “Stocks for the Long Run,” doesn’t like the idea of the alternative.
“If we don’t get growth abroad and block foreign countries from buying U.S. companies, the outlook for U.S. stocks is much worse,” Siegel said.
Yale course on how baby boomer retirement will affect stocks