The San Francisco Fed’s Generation Gap

Wednesday’s news included the release of a new San Francisco Fed study indicating retiring baby boomers may “strip away from equities a key source of support.” On its face, it doesn’t sound especially outrageous—after all, the baby boomers represent a large generation of investors. As they retire, so the theory goes, they’ll liquidate portfolios and ultimately decrease demand for stocks, hurting prices. Intuitive? Maybe not—this analysis is missing some key points.

First, consider the baby boomer generation itself. According to the US Census Bureau, baby boomers are those born between 1946 and 1964, meaning they’ll turn anywhere between 47 and 65 this year. A big range! So some boomers at the spectrum’s older end will likely begin retiring in the next couple years—maybe. Or maybe not—fact is, with life expectancies increasing, folks don’t always fully retire at 65 these days. Some may choose to continue working in some capacity for quite some time. Those at the baby boomer generation’s younger end are even further from retirement—18 years, give or take—and if life expectancies continue to improve as they historically have, they may also choose to work past 65. So the idea they’ll all wake up one day and uniformly decide to liquidate their equity portfolios strains credulity, since they’re not themselves a uniform group.

But even conceding that point momentarily, consider there are many other sources of demand to backfill lost baby boomer investors. For example, the millennial generation—also known as Generation Y or the Echo Boomers—will likely surpass the baby boomers, if it hasn’t already, as the largest age group. Meaning even as boomers retire, the Gen Yers will be entering the stage of life where they’ll likely look to invest—a large chunk likely going into equity markets given their very, very long investing time horizons.

Not only are younger generations a source of demand, but so are increasingly prosperous foreign citizens. America simply isn’t an isolated island, where no foreign money washes up on our shores. And as per-capita GDPs continue to improve in emerging markets and new markets open up, that’s another source of increasing demand long term.

Also, baby boomers currently have quite a bit of wealth tied up in less liquid instruments—like businesses and real estate. As they begin to retire, they may very well liquidate those less liquid assets in order to generate cash flow to live off—but they’ll still have cash proceeds to put somewhere. Presumably, a lot of that ends up in stocks and bonds.

Then too, given their time horizon—which, at 65, could even be a couple decades or more (and that’s for the very oldest boomers)—many of them will still need some degree of growth. For time horizons of 20 years or more (vastly more for most boomers), stocks have historically been a much better bet than other similarly liquid alternatives.

And of course, this is all predicated on the acceptance of demographic shifts as a driver of stock market returns in the first place. Any way you slice it, the baby boomers’ retirement is an ongoing process over the next 20-40 years, not the next 12-24 months. Historically, there have been plenty of demographically based investing theories, both bullish and bearish. But stocks just don’t price in what amount to glacial changes for good or ill—they price in events expected over the next year or two—particularly when those glacial changes likely don’t amount to a wholesale abandonment of equities, as many presume.