“Who will you sell your stocks to when you retire?” is an important question. With limited data, thinking through the various stories to see if they make sense is the only way to make much progress.
That’s the closing of John Cochrane’s comments on the recent San Francisco Fed paper:
Zheng Liu and Mark Spiegel at the San Francisco Fed wrote a very nice letter on demographics and asset prices, summarizing a lot of good academic work on the question.
See the graph to the left, taken from the letter: M/O is the ratio of middle aged to old, and P/E is the stock market price-earnings ratio.
It seems like a natural story: In the 1970s, there were relatively few prime-age savers around to buy stocks, and the prices fell. Starting in the 1980s to late 1990s, boomers entered their prime saving years, bought stocks and drove the prices up. And now that the boomers are retiring, they start selling, and watch out for prices! Zheng and Mark make a pretty discouraging forecast.