Baby Boomers and Stock Valuations
Will the retirement of baby boomers impact the valuations of stocks? Research published by the Federal Reserve Bank of San Francisco argues it may.
The study’s authors, Fed researchers Zheng Liu and Mark Spiegel, say age differences explain about 61% of the valuation changes that occurred between 1954 and 2010. They determined this by first calculating the ratio of adults aged 40–49 to those aged 60–69, which they called the M/O ratio (ratio of middle-age cohort to older-age cohort). They then compared the M/O ratio to the year-end price-earnings ratio for the S&P 500. As the M/O ratio rose from 0.18 to 0.74 between 1981 and 2000, the S&P 500’s price-earnings ratio tripled from 8 to 24. During the past decade, both the M/O ratio and the price-earnings ratio declined.
A reason for the shift is that as investors age, so do their allocation requirements. Older investors are likely to be more conservative, with a greater preference for asset preservation than asset growth. (Though Fidelity’s survey suggests this may not currently be the case.) As a result, bonds would be favored over stocks.
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