Demographic shifts impact on stock market value

[benrickert]

From the ERE book:
'Buy and hold is an investment strategy with no exit strategy. What this typically means is that stocks are usually
liquidated when money is needed, rather than taking into account when a given stock is overvalued. The
aggregate effect of workers investing in this manner is to turn the stock market into an elaborate demographical
Ponzi scheme, where the value of investments depends on how many people are retiring and how many people
are entering the labor market. In particular, it depends on the level of confidence that the most recent entrant has
in the system, and hence this becomes a policy matter. Diversification doesn't prevent the effects of something
as systemic as this. Instead, it reinforces the problem, as everybody behaves the same. If stocks are supplied and
demanded according to how many are entering and leaving the workforce, then market price becomes dependent
on demographics.'

@Jacob How has the demographic impact on the stock market shifted since the book was published? Do you still see this as a major driver of stock market performance? Has the Fed's money printing obfuscated demographic impact?

Views much appreciated

[jacob]

The boomer generation still holds the majority of US equity. At this point all boomers have finally reached the financial retirement age (59.5) that allows access to their pensions. Over the past couple of years private pension funds have indeed become net sellers of equity. This now provides downward pricing pressure as described in the quote above.

I see such things as rising tides or falling tides, inflows and outflows. Interest rates and capital inflows/outflows from the rest of the world also play a difference. Note, this are generational long trends that simply change the assumptions that one would make for long term planning. A good or at least familiar way to think about it is as a kind of sequence of return risk. Those who are retiring now (along with the boomers) are paddling against an outflow of money. This does NOT necessarily mean that stocks will go down---just that this effect is now hurting rather than helping. Other people could maybe step up and become buyers. This would be the smaller GenX or the younger and less wealthy Millennials---presuming they want to buy stocks and not crypto or avocado toast. It could also be capital inflows from other countries due to trade deficits (the money would be spent on buying stocks instead of spent on buying export goods). TINA is also an effect that can work for or against a market.

Add: "Tide" risks being a misleading metaphor. Think of it as tidal effects instead like the pull of the moon + the pull of the sun. They add up to the total tide. On top of that there are waves, etc. The demographic effect is one such pull and it's a large one. I can't say whether it's large enough to overpower all the other ones. All I can say is that it has now turned in the opposite direction.

[benrickert]

@jacob Agree with your reasoning. It is a scary effect for US equities and bonds if combined with foreigners being net sellers in a world shifting towards deglobalisation with more regional trading patterns and potentially capital controls.