Here’s an interesting chart from Deutsche Bank’s latest US Economics/Strategy Weekly report concerning the effect of demographics and retiring boomers on stock market valuations.
The problem in the US is that potential real growth is only 2 per cent or so on average for the next 10 years. With little inflation, let alone deflation nominal yields “belong” close to 2 per cent. Unfortunately the US is hard wired to much higher growth and asset returns. This can be summed up in terms of the powerful demographic of retiring baby boomers and the correlation with stock market capitalisation as a percentage of GDP. In order for stock values to be unchanged, normalization of the ratio to a retiring society implies average nominal growth of 6 per cent. This is also the magic number whereby stock and bond correlations flip around.
Photo: Deutsche Bank