CHART OF THE DAY: Here’s Why Old People Hurt The Stock Market

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The American baby boomer generation could hurt the faltering U.S. economic recovery according to a report by the Federal Reserve Bank of San Francisco (FRBSF).

Historical data indicates a strong relationship between age distribution of the U.S. population and stock market performance. Which makes sense, given that a rule of thumb for investors suggests that their asset allocation should mirror their age. Now concerns are that baby boomers looking to finance their retirement could sell off risky equities just as the stock market is starting to recover from the financial crisis.

The chart via FRBSF compares P/E ratio (price/earnings) with the M/O ratio (middle-age cohort to old-age cohort). It shows a correspondence between the two and signals that baby boomers could be a factor in the slowdown of stock markets over the next 20 years.

chart of the day, p/e ratio, m/o ratio, aug 2011