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Tak3natheFlood (98.90)

The Validity of Age Wave Theory: Harry Dent



December 05, 2008 – Comments (2) | RELATED TICKERS: GPS , SBUX

    While I often try to not give much weight to large movements in the stock market (and instead pay attention more to the actions of businesses), I have persistently been hearing about how retiring Baby-Boomers will have a large effect on the stock market over the next few years. Many would like to draw the connection that this aging is also exacebated by traditional trends in consumption throughout life that are almost unavoidable. This phenomenon, coined by Harry Dent and termed as Age Wave Theory, states that spending and earning are highest in the mid-late 20s to the 50s and then decline later in life. These two factors then represent a significant effect on the market where large scales of earnings, to the tune of 3 Trillion according to AARP are slowly leaving equities. For the United States, a country that has 67 million baby-boomers, (those born between 1946-1964) this represents a problem not just as far as public programs like social security, but as far as our overall consumption-based economy is concerned.

    In 2005 the U.S. adult workforce stood at about 142,076,000. About half of these workers then are soon to retire between 1996 and 2024 with the median year being 2010. As retirees, with many with most of their wealth in the U.S. equities, begin to move to cash and pull out resources this creates strong downward pressure on the market. The same generation that had reaped the benefits from the post-war boom years and the acts of the Federal Housing Administration are going to be allocationing less resources to upgrading their houses, buying new cars, and shopping around for unessential goods. In a recent article in Canadian Business, Dent says that bonds will outperform stocks and that stock returns over the next decade could average about 5%. Other estimates I've seen have been around 9% and if the market turns really south those returns over a decade will inversely go much higher. 

    What does this all mean then? For long-term investors very little in fact. Growth will be slow but their are many great companies out their at great discounts. While some dividend yields are too high to be sustainable their are many companies with wide moats and strong yields. For baby-boomers I think its safe to say many who were too skiddish about their investing have now moved to cash but for the bold their should be safe returns moving forward. For the retiree with a large allocation of stocks drawing as little as possible from those funds early will aid them in that long-term results can be preserved and inflation will be easily defeated. Another approach includes investing abroad which will provide a good way to beat the market with young, growing countries like Brazil and Turkey. Industries that will suffer in the U.S. are clearly in consumption. The Gaps and Starbucks built their success on the pillars of the baby-boomers and that support could very soon be lost. Harry Dent who has studied large macro-trends like this before cited the slowdown in Japan as a result of the majority of their population aging in the 90s. A decade in which many deemed the lost decade. 

    While the Baby-Boomers do represent an essential part of our economy, if not THE essential part, the U.S. should benefit from a significant young population of around 75 million and immigration depending on future foreign and border policy. If you get a chance to read the article you definitely should check it out as the link is provided below.

2 Comments – Post Your Own

#1) On December 05, 2008 at 12:08 PM, Gemini846 (34.12) wrote:

The problem is that not as many baby boomers have thier money in equities as you think, and they will have even less when those who haven't retired yet keep working because thier false net worth was wiped out in this market correction.

Now many of them do have a lot of home equity and w/out a good portion of them taking reverse mortgages we will see further glut on the home market keeping prices lower than most people would like.

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#2) On December 05, 2008 at 12:49 PM, johnw106 (< 20) wrote:

Another thing that may have some impact.
Todays retiree is not the tired old man sitting on the porch twiddling his thumbs as seen in Rockwell portraits of yore.
Many seniors are in good health and lead active vibrant lifestyles. Here in central Florida where I live the retired population are involved with everything from hiking trails to jumping out of airplanes.
It would be a mistake to discount the spending habits of this demographics impact on local economys.

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