Baby Boomers to Cut Their Own Throats Financially?

Baby boomers, one of the largest groups to invest in the stock market over the past 30 years, will start to sell their portfolios as they retire. This will put an unprecedented drag on the stock market. The theory seems good on paper, but it is one dimensional.

The Federal Reserve Bank of San Francisco has released a research paper on the topic. Its major point:

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. 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 conclusion assumes that this inventory of equities will not be bought aggressively by other parties. The FRBSF has no evidence to the contrary. It points out that foreign buyers may be fewer in the next decade because they tend to invest in their own markets, and many of the people in oversees nations are aging, too.

However, the equities markets are hardly dominated by individual investors anymore. Most activity is based on institutional trades. Large financial firms nearly always detect trends that lower equity prices and move into the market to buy what they perceive as bargains. That pushes prices upward at some point. It has certainly effected the stock market recently as unusually large volumes have accompanied wild changes in prices.

Another factor that influences stock prices in the next decade will be earnings and corporate activities meant to drive share prices higher. Many experts believe the equities are inexpensive now based on historic data. Earnings have defied gravity the past two years, and they have improved while the general economy has remained depressed. Large companies have begun to buy back stock in great numbers and to increase dividends. M&A activity has increased due to capital that is inexpensive and big cash balances held by many large public corporations.

Perhaps the greatest bull market in history began in the early 1960s and ran until the latter 1970s. Later, the DJIA rallied from 2,000 in early 1988 to 13,00o in late 2007. Many baby boomer parents retired in this period. The effects of that on the stock market, if there were any, appear to have been inconsequential.

The markets will continue to rise, intermittently, as they have since the 1930s. Boomer retirements are not likely to change that.

Douglas A. McIntyre