Demographics: the missing piece

Demographics: the missing piece

Christopher Dembik

Head of Macroeconomic Research

Summary:  The younger population, whose size is shrinking, is for the first time on record less optimistic than the oldest generation.


The view of many investors is that the latest market developments related to the COVID-19 outbreak are a temporary downturn in a 10-year secular bull market, similar to those previously seen in 2016 and 2011. Their main argument is that loose monetary policy, including low interest rates alongside accommodative monetary policy such as QE, will continue to serve as the main market driver. 

We have been here before, notably during the secular bull market of the 1950s and early 1960s. During most of that period, the Federal Reserve followed a ‘lean against the wind’ monetary policy that ultimately lead to the Great Inflation. Too-loose monetary policy had a dramatic effect on the economy and the level of inflation. Policymakers at the Fed misjudged how hot the economy could run without increasing inflation pressures and when CPI started to rise, monetary response was too slow. Oil and food prices only exacerbated the issue.

In 2020, the global economy is facing a much more difficult challenge that may lead to similar consequences if not controlled: stagflation. In the coronavirus era, state emergency and the double shock on supply and demand are likely to depress growth sharply, thus increasing risk of recession. Governments are ready to do ‘whatever it takes’ to mitigate the crisis. We are moving from ‘bailout the banks’ in 2008 to ‘bailout SMEs and anything else’ in 2020. 

The huge fiscal stimulus that is coming is likely to increase inflationary pressures in months to come. Contrary to common thinking, at Saxo we doubt that the coronavirus is a temporary market shock. We think that the COVID-19, along with another underestimated factor, demographics, will precipitate the end of the secular bull market. 

In our view, demographics are the ultimate indicator of how the economy and the market will evolve decades in advance. In 2011, a research paper released by the Federal Reserve Bank of San Francisco entitled ‘Boomer Retirement: Headwinds for U.S. equity’ pointed out the strong link between stock market performance and the US population’s age distribution. Using data from 1954 through 2019, it found that booming population explained about 61% of the variation of the P/E ratio over the sample period.

In the post-war period, a phenomenal increase in the population generated record levels of income, great wealth, higher consumption and increased economic activity. At the same time, groundbreaking innovations increased productivity and created new industrial clusters. The combination of booming population and industrial innovations were key factors behind the bull market.

Now, the booming population is the missing piece that may put a definitive end to the secular bull market. The baby boomer generation — which represents more than 76 million people in the US alone — is transitioning out of the workforce and drawing down on its retirement funds. This may structurally depress equity valuations in the coming years. 

There are not enough buyers in front of them to compensate when they eventually sell. The younger population, whose size is shrinking, is for the first time on record less optimistic than the oldest generation. This will have a direct impact on money behaviour and favour saving rather than investing, despite low interest rates. 

Even if they want to invest on the stock market, millennials cannot. The everyday consumer has never really recovered from the last recession and inequality is increasing, at least in the US, which does not draw a bright outlook for spending in the future.  We can already observe the same exact situation in the US real estate market. Baby boomers are offloading their huge rural properties, but millennials cannot afford to buy them. Demographics will disrupt not only the stock market — they’ll disrupt the financial sector as a whole. 

Retirement of the baby boomers happens at the worst time ever for the stock market, when other structural factors are already affecting the macroeconomic outlook. Loose monetary policy, for example, has dramatically increased debt-to-GDP ratios — which are now at unsustainable levels — and diverted capital from productive investment. The amount of debt in the system, especially in the private sector, is dragging down productivity and the economy overall. 

The system that prevails, which is centred on central banks providing unconditional liquidity, is inefficient and has not been able to foster the emergence of decisive disruptive innovations. We are reaching the limits of this system, with spreads on high yields reaching crisis-levels on the back of the COVID-19 outbreak. 

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.