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It’s a question we suspect that a lot of people have wondered about: Are US equities doomed, merely because over the coming years, a growing wave of retirees will sell assets to pay for their retirements?In a note called Respect Your Elders, Bo fA economist Neil Dutta takes a look at this “Asset Market Meltdown Hypothesis” and notes that while it’s intellectually appealing, the concerns are probably overblown.
First, he notes the simple economic equation behind the meltdown theory: P*K = Ny*S
On the left side you have the asset market P*K where P = the price of assets and K = The supply of assets.
On the right side you have the investor/saving side, where Ny = the number of savers and S = the savings rate.
So in theory, as the population ages, the number of savers drifts lower, and the value of assets declines. Simple, right?
Not really. One huge problem is that seniors don’t stop saving (as you might expect), and actually, household holdings of financial assets tend to keep rising, up until about when age hits 75, when they decline, but remain higher, still, than the holdings of people who are 45-64.
But what about some more idiosyncratic reasons why seniors might dump stocks?
He lists several reasons why this might be an issue.
- Entitlement programs won’t be as favourable as with future generations thanks to various benefit reductions. This means they may have higher medical costs borne directly, which will push them to dump investments.
- Huge US debts (today) will likely mean higher taxes (tomorrow).
- Unlike in their past, many seniors will find that their houses are not monetizable assets.
- The weak market over the last 10 years might mean that seniors (who are generally risk-averse) will be even less inclined to keep money in stocks.
But there are counters…
- Household holding of equities remain extremely low based on historical standards. So the dump has already happened.
- The S&P 500 is increasingly global. It’s becoming more correlated with international markets, and there’s no reason that foreign investors can’t pick up the holdings of dumping seniors.
- US demographics are still WAY more favourable than other emerging markets.
- Older workers are working longer, and thus have no need to dump stocks.
- Given all this: The more likely move by seniors is a shift towards income-generating investments.
So that’s the debate. Ultimately we suspect that the idea that retirees = crash is a little too pat.
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