August 30, 2011

San Fran Fed: Boomers’ Exit From Stocks Bodes Ill for Market

U.S. equities market could see depressed values for two decades as boomers retire, researchers warn

The Federal Reserve Bank of San Francisco has published an economic report warning that the aging of the baby boom generation will likely create a slowdown in the stock market as boomers retire and shift from buying stocks to selling them.

In an economic letter dated Aug. 22, “Boomer Retirement: Headwinds for U.S. Equity Markets?”  San Francisco Fed researchers Zheng Liu and Mark Spiegel write that a strong relationship exists between the age distribution of the U.S. population and stock market performance. Both historical data and statistical models suggest boomers’ shift to selling their stock holdings could be a factor holding down equity valuations over the next two decades, the researchers warn.

“The baby boom generation born between 1946 and 1964 has had a large impact on the U.S. economy and will continue to do so as baby boomers gradually phase from work into retirement over the next two decades,” Liu and Spiegel write. “To finance retirement, they are likely to sell off acquired assets, especially risky equities. A looming concern is that this massive sell-off might depress equity values.”

The researchers argue that the sustained asset market booms in the 1980s and 1990s can be attributed to the fact that baby boomers were entering middle age, the prime period for accumulating financial assets. Now, they say, boomers are entering the de-accumulation period.

But, they acknowledge, some older investors will remain in the stock market.

“Retired individuals may continue to hold equities to leave to their heirs and as a source of wealth to finance consumption in case they live longer than expected,” Liu and Spiegel write.

In addition, they say, foreign demand for U.S. equities might reduce the downward pressure on asset prices, though the foreign effect is probably limited. First, they point to research showing that other developed nations have populations that are aging even more rapidly than the U.S. population.

Second, there is substantial evidence of “home bias” in equity holdings, the Fed researchers write. “Individual investors typically hold disproportionate shares of domestic assets in their portfolios. For example, in 2009, the foreign equity holdings of U.S. investors were only 27.2% of the share of foreign equities in global market capitalization.”

To be sure, many boomers since the financial crisis and the recession hit have reported that they can’t retire. And reports vary over whether boomers are prepared to retire.

For example, a new report from the National Bureau of Economic Research and the Rand Corp. finds that seven in 10 Americans between the ages of 66 and 69 are “adequately prepared” for the consumption levels required for a successful retirement.

However, another new study from Bankers Life and Casualty Co, Center reports that one-third of boomers with between $25,000 and $75,000 have not seen any rebound in their retirement accounts, and that their retirement dreams are fading.

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