Post on 10-Jan-2017
transcript
Boomer Outflows25 May 2016
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AccountabilityScenario Updates
Market Update
Aging + Markets: Theory
Aging + Markets: Reality Today
Scenario: Boomer Outflows
Boomer Outflows
NEW
HiddenLevers
MARKET UPDATE
Market Update
sources: HiddenLevers, Marketwatch 1 2, Houston Chronicle
Oil bankruptcies mounting
China: Kids are all right
Uber self-driving
cars
HiddenLevers
AGING + MARKETS: THEORY
Aging + Markets: Schools of Thought
• Key Proponents: SF Fed Researchers, Research Affiliates, Harry Dent
• Claim a relationship between aging and market P/E
• Claim other countries show negative returns corresponding to age
• Key Proponents: MIT Prof. James Poterba, Vanguard research team
• Claim weak relationship between aging and equity performance
• Boomers won’t really sell a high percentage of stocks
Optimists Pessimists
sources: Vanguard, NBER, SF Fed, Research Affiliates
Aging + Markets: Optimistic View
sources: Vanguard, NBER
The relationship between increases in % of retirees and stock returns is weak at best
NBER study found no relationship between stock prices and aging, and a mild relationship between P/E and aging
Terrible R2
Aging + Markets: Pessimistic ViewResearch Affiliates Data from 60 countries, model market return by age group
Found strong negative impact for 65+ age group
SF FedModeled P/E vs ratio of middle age to old in USA
Found that P/E tracks with larger middle aged group
Model indicates market P/E may fall until 2025
sources: SF Fed, Research Affiliates
HiddenLevers
AGING + MARKETS: REALITY TODAY
Reality: Demographic Snapshot
sources: HiddenLevers, US Census Bureau, Populationpyramid.net
worker base shrinking
1980 2025
Working Girl
GoldenGirls
Reality: Baby Boomers + US Equities
• Boomers at age 40 Begin equity investing
• Market up 614%
• Boomers at age 60• Reduce Equities• Market up 61%
sources: Vanguard, Google Finance
S+P Logarithmic Return
Will returns get worse as Boomers age?
1985-2000 2005-now
Reality: Gen X + Millennials Investing?
Activity Boomers MillennialsMarriage Age 23 30Household Formation(18-31) 56% 23%% with college degree 25% 38%Investment Vehicle 401(k) Robo
Millennials Delaying life
Burdened with debt
Don’t trust stock market
Equities held by Boomers age 46-64
Young Boomers did not own equities
sources: AmericanProgress, Goldman Sachs, Vanguard, Bloomberg
Reality: Mitigating Factors (Demographic)
sources: HiddenLevers, SF Fed, Forbes, Zacks
Boomer retirements
coming slowly(over 18 years)
Boomers living longer
+still investing
Boomers need to invest due to lost savings in
2008 crisis
Reality: Mitigating Factors (Market)
sources: HiddenLevers, SF Fed, Forbes, Zacks
Globalization of US Stock Market
Wealth Concentration1% of Boomers owns 1/3 of Boomer assets
10% of Boomers own 88% of Boomer equities
20% of Boomers own 96% of Boomer equities
Perpetually Low Rates
+Low Yields
HiddenLevers
SCENARIO: BOOMER OUTFLOWS
Scenario Update: Demographics Emphasis
Boomer Outflows
Immigration Fight
GOOD: Millennials Fill Gap
source: HiddenLevers
Younger investors make up for Boomer outflows
Fixed income fruitless for
Millennials/Gen X
Wealthy Boomers don’t need to sell
Foreign demand continues
EM outflows seek shelter in US
equities
BAD: Gradual DeclineBoomers living longer + not retiring = no quick drain
source: HiddenLevers
lofty valuations unsustainable
PE decline25 20
gradual equity sales don’t
compress PE
Millennial entry delayed
UGLY: Mass Exodus
PE decline25 15
source: HiddenLevers
Boomers liquidate equities to fund retirement
worker/retiree ratio falls sharply
2010 forecasted decline now 5 years late
Scenario: Boomer Outflows
Good:Millennials
Fill Gap
Bad:Gradual Decline
Ugly:Mass Exodus
Market P/E
15S&P
-40%
Market P/E
20S&P
-10%
Market P/E
25
Millennials begin to enter equity markets, filling the gap left by aging boomers. Wealthy boomers hold 90% of equities, making excess sales unlikely.
The gradual decline in Boomer market participation is offset by younger investors, but market valuations cannot maintain current lofty levels.
Boomers do shift away from equities, lowering demand for stocks and compressing S&P P/E to 15 by 2020s.
S&P
+35%
Boomer Outflows – Take Aways
Low interest rates force everyone into equities
2008 Financial Crisis made Millennials distrust Equity markets
10% of Boomers own lion’s share of Boomer equities
S+P PE Ratio will compress if Boomers start liquidating