Retiring Baby Boomers may Cripple Stock Market Recovery

The stock market may be in for another series of blows as baby boomers retire and sell off their portfolios, economists predict in Boomer Retirement: Headwinds for U.S. Equity Markets?, released by the Economic Research Department of the Federal Reserve Bank of San Francisco (FRBSF).

Historical data points toward seniors selling their equity holdings, rather than buying stocks, once they reach retirement age. For the next 19 years, Pew Research indicates, 10,000 baby boomers will turn 65 each day, and the stock market will likely bear the implications of the generation’s retirement actions. Currently, 13% of the U.S. population are 65 or older, and this will increase to 18% by 2030.

“It is disconcerting that the retirement of the baby boom generation, which has long been expected to place downward pressure on U.S. equity values, is beginning in earnest just as the stock market is recovering from the recent financial crisis, potentially slowing down the pace of that recovery,” reads the letter.

Market booms in the 1980s and 1990s could be attributed to the baby boomers entering middle age and accumulating their financial assets, say the FRBSF researchers, and the converse may be true as this generation retires.

The researchers used a statistical model that examines the relationship between the equity price/earnings (P/E) ratio, and the age distribution ratio between the middle-aged (40-49) and old-age cohorts (60-69) (M/O), and found a strong correlation between the two.

Between 1981 and 2000, as baby boomers reached peak working and saving ages, research found, the higher M/O ratio led to a tripled P/E ratio. Then, in the 2000s, as boomers started aging, both the P/E and M/O ratios began to decline.

This evidence suggests that the United States’ equity values are closely related to the age distribution, says FRBSF.


Using projected U.S. Census Bureau data for age distribution estimates, the researchers again examined the relationship between the M/O ratio and the P/E ratio to predict the future trajectory of equity performance. They found that the potential P/E ratio will decline persistently in the next 15 years or so as the population ages, before recovering somewhat by 2030. This correlated closely with predictions for the actual P/E ratio.

“Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010,” the researchers say. “The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027.”

Despite a gloomy outlook, FRBSF says, the M/O ratio is expected to “rebound” in 2025, leading them to expect a strong stock recovery.

Read the full economic letter here.

Written by Alyssa Gerace

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