Demographic Headwind for U.S. Stock Market?
August 30, 2011 - Big Ideas
Will disinvestment of the baby boom generation retard U.S. equities? In their August 2011 letter entitled “Boomer Retirement: Headwinds for U.S. Equity Markets?”, flagged by a reader, Zheng Liu and Mark Spiegel revisit the relationship between U.S. age demographics and U.S. equity valuation as indicated by the lagged price-earnings ratio (P/E). They calculate P/E based on year-end level of the S&P 500 Index adjusted for inflation and inflation-adjusted S&P 500 earnings over the prior 12 months. They specify a critical demographic metric, M/O, based on the ratio of the middle-age cohort (ages 40–49) to the old-age cohort (ages 60–69), epitomizing equity investors and equity disinvestors, respectively. Using annual data for 1954 through 2010, they find that: Keep Reading