Tuesday, August 23, 2011

Will Baby Boomers Sink the Stock Market?

Michael S. Derby of the WSJ asks, Will Baby Boomers Sink the Stock Market? (HT: Frank):

The next quarter century or so could be a tough one for the stock market, researchers at the Federal Reserve Bank of San Francisco warn.

In a paper released by the institution Monday, two of its staffers said the retirement of the Baby Boom generation stands to strip away from equities a key source of support.

The ongoing wave of retirees won’t crater the market, but they may well be “a factor holding down equity valuations over the next two decades,” Zheng Liu and Mark Spiegel write.

As they see it, what the Baby Boomers have given to the market is something like what they will be taking away.

“U.S. equity values have been closely related to demographic trends in the past half century” across several key metrics, the economists write.

“In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values,” Liu and Spiegel write.

As much as it is a problem for the market over the long haul, as retirees sell stocks to try to maintain their lifestyles, the “well known” nature of the troubles is also a problem for markets now. Indeed, if current investors start pricing in the coming Baby Boomer headwind, they may “depress” stock prices.

“These demographic shifts may present headwinds today for the stock market’s recovery from the financial crisis,” the paper said.

Liu and Siegel allow that considerable uncertainty surrounds their work. Other important influences on the outlook for stocks are the performance of the bond market, as well as the appetites of foreign buyers. They cited China as one potential wild card, saying that nation and other emerging economies “may relax capital controls, which would allow their nationals to invest in U.S. equity markets.” That could counter some of the drag generated by U.S. retirees.

I take all these demographic studies with a shaker of salt. Apart from the potential of foreigners buying US stocks as baby boomers retire, there is the potential that baby boomers will live longer, more healthy lives and many will push back retirement as far as possible. Just today, I read exciting news about researchers finding the common cause for ALS, a discovery could have a broader impact on treatment of other neurodegenerative diseases also characterized by the irregular accumulation of proteins, like Parkinson's, Alzheimer's disease and other dementias. Closer to me, researchers are now starting trials using adult stem cells to treat MS.

This is all very exciting news and as more and more people adopt healthy lifestyle choices, I wouldn't be surprised to see a significant impact on lifespans. And this myth that people are going to sell all their holdings in stocks is way overdone. Besides, retail and institutional investors don't control the stock market, machines do. In this wolf market, multi-million dollar computers trading at ultra-high frequencies are creating fictitious volume, making a killing in up and down markets.

That's why even though I'm wasn't surprised to see risk assets rally on Tuesday, I don't get overly- excited about a rally based on stimulus expectations from the Fed's following this Friday's Jackson Hole meeting. This is the way I'm personally playing the Fed meeting: I remain long risks assets but expect traders to sell the news whether it's a stimulus or not. And if stocks sell off again, I'll be buying the dip. If they keep grinding higher, I will keep buying up. Others, like Chis Ciovacco, think that buying the dips here is lethal because numerous long-term bearish signals recently appeared on weekly and monthly charts.

Finally, watch the Bloomberg interview with Marc Faber below. Several gold bulls have warned that the gold rally is overdone and due for a pullback, but Mr. Faber is still long gold and he doesn't see the S&P making new highs. Who knows? I can make an equally persuasive argument as to why I see massive liquidity in the global financial system and how yield starving, momentum chasing institutions will run-up high beta stocks in the last quarter to make up for the savage losses they experienced over the last few weeks. And as I stated before, when it comes to bonds outperforming stocks over the next decade, never say never.

Remember, in these markets, you can move from extreme oversold levels to extreme overbought levels extremely quickly. Once performance anxiety sets in, greed takes over, and we're off to the races again and have to pay attention for new bubbles. Don't worry, baby boomers will be part of the next bubble, I guarantee it.

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