If the children are our future, some economists and pundits think the US’s prospects look bleak. Some worry falling birth rates put the US economy at risk, and the recent fall of an iconic toy store is allegedly a canary in the coal mine. Should investors be worried about a baby bust? In our view, no: Demographic issues like fertility rates are generally too slow-moving and widely known to impact stocks.
The logic behind demographic market and economic outlooks seems straightforward. If folks aren’t having as many kids, this sets up a potential double economic whammy: less spending today and fewer consumers tomorrow. Bad for consumption-heavy economies like the US and many other developed markets! Plus, a greying population will have to reckon with other possible negative downstream effects, like labor shortages and a lack of funding for Social Security or state pensions. Though fears about a declining population aren’t new, the concern has made some inroads lately. Some recently blamed all-time low US fertility rates as a factor in Toys 'R' Us's demise—not enough little ones screaming they don’t wanna grow up left to support business.
However, from an investing perspective, we believe these fears are off: Demographic issues don’t change quickly enough to materially alter stocks’ primary drivers. Supply and demand are the two biggest factors impacting stock prices. Equity supply is relatively fixed in the short term since it takes time to create new shares (e.g., IPOs, secondary offerings, stock-based mergers, etc.). This means demand drivers—the economic, political and sentiment-related factors that influence investors’ willingness to bid a stock’s price higher—matter more for the foreseeable future, which ranges over the next 3 – 30 months. Stocks price in all widely known information, but anything beyond that timeframe gets hazy. Too much can change! Stocks can’t determine what is probable yet, so they wait until they get more information.
This is why demographic issues like falling fertility rates and population trends don’t move stocks. Because they change so slowly, they aren’t disrupting the economic drivers stocks care about. They also aren’t sneaking up on anyone. A lower fertility rate’s eventual implications get telegraphed years and years in advance, sapping any potential negative surprise power. The World Bank’s population pyramids get oodles of attention. Moreover, many demographic fears tend to extrapolate current trends into the future. But things change! A low fertility rate could result in a smaller population a decade or two down the road, which may ding consumption. But that forecast assumes spending declines in old age—something medical bills, education for grandchildren or vacation travel don’t render automatic. Also, folks are living longer than ever before thanks to healthcare advances. We reckon the senior citizens of tomorrow will have even more years to spend on toys of their own.
Plus, what if there is a rebound in births? The fertility rate bottomed in 1976 and has bounced between 1.7 and 2.1 births per woman since then.[i] Millennials are just now entering their prime household formation years, and these Baby Boomer offspring could produce a boom of their own. External factors like immigration could alter the demographic makeup of the US, too. And don’t understate the problem-solving prowess of capitalism, which has harnessed the power of human creativity ever since Adam Smith wrote The Wealth of Nations several hundred years ago. We aren’t betting people, but we have faith capitalism, free people and private enterprise will continue creating solutions to the “unsolvable” problems of tomorrow.
While that distant future is unknowable, we have lots of evidence decades-long forecasts tend to be exercises in futility. For example, back in 1999, one well-known forecaster predicted the Dow would climb from about 11,500 to 35,000 by 2009 because of demographics. By 2009’s end, the Dow stood at 10,428[ii]—seems like that guess was a wee bit off. It isn’t just market calls or demographic trends, either. For example, the Congressional Budget Office has a less-than-stellar record in projecting the budget. We aren’t saying this to pile on any one forecaster or research outfit. The logic and rationale may be sound at the time, but relying on straight-line math can’t account for how economies and markets will transform.That said, successful investing doesn’t require predicting the distant future. But if you need equity-like growth, you likely do need to fully participate in bull markets—not doing so could hamper your portfolio’s ability to provide for your long-term needs. In our view, there are plenty of reasons to remain bullish toward global stocks for the foreseeable future—we don’t see a potential “demographic time bomb” as reason to exit equities.
[ii] Source: FactSet, as of 3/28/2018. Dow Jones Industrial Average Price on 12/31/2009.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.