Will Changing Demographics Affect Financial Markets?

Many investors are concerned that the aging baby boomers will adversely affect equity markets and home prices by dumping their stocks and selling their homes, leading to a sharp decline in prices for both.

Changing Demographics: Economic Implications

The aging population will definitely have economic and financial consequences.  As older workers retire, the limited availability of a replacement workforce will likely result in slower economic growth.  This, in turn, will reduce annual corporate earnings and profit growth.

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The implication for investors is that the average annual returns on stocks would probably go down by about a percentage point (according to TD analysts).

Changing Asset Allocation

Investors are advised to change their portfolio asset mix as they age, replacing their equities with fixed income products.   This promotes the fear that equity markets will plummet.

However, the boomer generation spans 18 years (born between 1946 and 1964), so the impact of any asset sales should be spread out.  This gradual selling will be indiscernible against normal year-to-year fluctuations.

It is probable that the main shift will be away from small-cap and growth stocks to large-cap and high yield dividend-paying stocks as older investors attempt to increase their income before depleting their assets.

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Also, bond yields are so low that fixed income products will probably only provide capital preservation, especially after accounting for inflation and taxes.

The impact will also be limited by the fact that baby boomers are living longer, healthier lives.

Housing Markets

As baby boomers start selling their homes, any increase in housing supply will be offset somewhat by a reduction in new home construction.  Therefore, it’s unlikely that the real estate market will be depressed for this reason.

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Regional economic development and increased immigration will affect house prices in major urban centres more than the unlikely event that all the boomers sell their houses at the same time.

Changing Spending Patterns

Baby Boomers’ spending patterns and shifting needs will influence different industries and sectors.  For example, longer lifespans and the focus on preventative care will encourage greater spending on health care, new drugs and managed care facilities.

Lifestyle communities are being created and the leisure and travel industries are gearing up for a huge increase in consumers looking for ways to spend their retirement time.

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Financial services and information technology are also sectors likely to profit.

Needless Worries

It’s clear that changing demographics will affect the economy and financial markets in the years ahead, but worries about a dramatic negative effect are exaggerated.

As Canada’s population changes, spotting the opportunities is more important than worrying.

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  1. W at Off-Road Finance on September 26, 2012 at 6:50 am

    I think the effects will be MUCH more dramatic than suggested. The major market moves of the last 30 years all correlate closely in terms of timing to the boomers’ participation the markets. I suspect the results of them selling trillions in securities will be just as dramatic as the effects of them buying them.

    My take:

    • Boomer on September 26, 2012 at 2:09 pm

      @W at Off-Road Finance: I don’t agree with your conclusions. Boomers did not start participating in the stock market on a large scale until banks began selling mutual funds and operating discount brokerages – late 80’s/early 90’s – thus making it easy and more affordable.

      Economic growth and stock market increases were not merely the result of stock purchases but also population growth due to immigration, low interest rates and consumer confidence, as well as expansion into the global markets.

      Early retirees (50-55 years) are likely recipients of defined benefit pension plans (not cashing in their assets) and the first boomers are just into normal retirement age of 65. Younger boomers are just hitting their 50’s. With people experiencing longer life spans, you’re looking at a time period of around 50 years – hardly a dramatic time period for mass equity sales. Besides, people who entered adulthood experiencing double digit interest rates are hardly going to roll over into fixed income products paying 2-3% if they can hold onto their bank stocks instead.

  2. Joe on September 26, 2012 at 7:04 am

    It’s not just a supply problem. It’s a demand problem.

    When the housing bubble pops, Gen X will be toast. Their debt levels are the most laughable compared to income. Perhaps they have the most to gain from moving up when Boomers finally leave work. But I think a lot of Boomers will be working til they’re dragged from their corner offices.

    Gen Y is either unemployed/in student debt, or they’re HGTV Youth Corps idiots who are employed and bought a 0-down condo (or “forever home” as the misnomer goes). They’ve never seen a housing downturn so they’ve piled into housing and piled on debt.

    Having money socked away is great, but for money (or stocks, bonds etc) to have value, you need a productive economy of people labouring (generating wealth) to recycle that money.

    So the grand question is, who’s going to BUY overpriced investments?

    • Boomer on September 26, 2012 at 2:20 pm

      @Joe: Most companies still require their workers to retire at 65. Those older likely own their own businesses or are otherwise self-employed. Then there’s the greying horde going into the lowly retail positions for extra income.

      To grow and profit, businesses will have to be become lean and innovative. The younger generation will have to sharpen their skills as companies look to hire the very best – and will pay well to get it.

      There’s enough information out there on good debt and money management. Learn the lessons from the worst offenders (boomers) while you still have time to turn things around.

  3. Connie Solidad on September 26, 2012 at 10:13 am

    The United States is obviously running into the same problem with baby boomers now changing their spending habits and on a side not more of them requesting retirement benefits from the government. Also the Canadian workforce is shrinking as birthrates are falling.

  4. James on September 26, 2012 at 2:06 pm

    I do think the “age of the boomers” is something to be concerned about. With pensions being a thing of the past and social security payments being to low for most (in the United States), many of those that should be retiring are not. Furthermore, the people that do retire often look for “after retirement jobs”. This floods the job market with over qualified people looking for a job at an entry level pay grade. For example, yesterday, at McDonald’s, a lady who was probably in her mid-seventies took my order. What happened to all the high school kids that used to work here after school? I think the impact of the baby boomer generation will be more like ripples in a pond, they will start small but will be far reaching.

    • Boomer on September 26, 2012 at 2:30 pm

      @James: High school kids don’t want to work at fast food/retail places and, from my experience, many have a terrible work ethic so these employers would rather have older workers who they deem more responsible – i.e. show up for work when their shift starts.

      Yes, there are responsible youngsters who work hard and save their money for college, etc. but too many others seem to have a sense of entitlement and are quick to blame others for perceived wrongs to them (and boomers get the brunt of the blame).

      Every generation has (or has had) challenges and think the previous generation had it better than them. You have to work with what you have in the times you live.

  5. The Passive Income Earner on September 26, 2012 at 4:37 pm

    I am with Boomer here and it’s so much more complicated than any of the points mentioned I believe. Take technology for example, it brought in many investors that know nothing about investing and are day trading and losing money for the most part. Technology also improved efficiency over the past decades helping companies retain profits. Healthcare research has made amazing progress and life expectancy is higher which means higher contributions. In some cases, corporations probably want many of their employees to retire and move on so they can pay less (pension plans are expensive).

    Everyone and every companies will adjust and it’s usually done over time with gradual adjustment. Natural law will apply.

    What’s fixed is that funeral homes will have more business 🙂

    • Boomer on September 28, 2012 at 2:46 pm

      @The Passive Income Earner: Thanks for your comments. Even though circumstances will be different, the future will bring new sets of challenges but also opportunities.

  6. Sudip on September 26, 2012 at 10:48 pm

    As you pointed out – 18 years is a long span and any excess in supply will gradually be absorbed by the market.

  7. Money Beagle on September 27, 2012 at 9:32 am

    I think it will be interesting to see how it plays out. The impact really can’t be known. You also have to figure that as people from that generation die, they will leave assets to their children, many of whom will likely keep the money in the markets. So, many of the doomsday predictors seem to think that 100% of the boomers money will be removed from the market, which is a far-fetched scenario.

  8. Gary on September 29, 2012 at 8:15 am

    Great post Boomer. As a 1946 boomer i totally agree with you!

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