Why Stocks Shouldn’t Bawl Over a Baby Bust

Earlier this month, the Centers for Disease Control and Prevention (CDC) reported the number of US births fell -4% in 2020 to 3.6 million—the lowest since 1979. This, plus similarly dreary birth data from other nations, rekindled a recurring concern: Will falling birthrates in the developed world and China set up future economic and market trouble? We don’t think so—recent demographic trends aren’t destiny, and they aren’t hugely relevant for stocks.

The 2020 data are the latest in a longer-running trend: Populations worldwide are graying. Besides the dip in births, America’s general fertility rate (the number of births per 1,000 women aged 15 – 44) and total fertility rate (the expected number of births a woman would have over her lifetime) each dropped by -4% last year, too.^[i] These generational lows, which confounded many folks’ expectations for a lockdown baby boom, extend a longer-running decline—see the general fertility rate’s ongoing slide since 2007.^[ii] Similar trends reign abroad. The EU’s total fertility rate has been falling over the past decade, while Japan has long been the posterchild for declining births—to the point some parts of the country give parents a cash grant for each child they have.^[iii] Many experts now sound alarms about China’s slowing birth rates even with the abolition of the one-child rule in 2015.

Last year’s baby bust has spurred mostly pessimistic outlooks among the punditry. With birth rates below replacement levels (i.e., the number of births needed for a generation to replace itself), some worry economic growth will fizzle out eventually. If there are fewer young people, the thinking goes, who will produce tomorrow’s goods and services—and who will buy them? Where will ideas and innovations come from to tackle new problems? Who will take care of tomorrow’s elderly?

While this seemingly dire outcome is possible, it is far from probable, in our view.^[iv] Not-too-distant history shows the number of births and general fertility rates can ebb and flow—they fell for much of the 1970s in the US before rising throughout the 1980s.^[v] We aren’t projecting a similar boom now, but trends persist until they don’t. Moreover, the focus on fewer births overlooks another development: Even with some well-publicized recent blips, people are living longer lives thanks to technological and health care advances. The average American born in 1970 has a life expectancy of about 71 years; that is up about 8 years for the average American born in 2018.^[vi] Yet it isn’t just the young who benefit from improving living standards. The average 65-year-old American in 2018 can expect to live for close to 20 more years—about 5 years longer than a 65-year-old in 1970.^[vii] We also stress these are averages, and results can vary based on sex, locality and race to name just three variables. Some will fall short of that average life expectancy while others will trounce it, but in general, Americans are living longer than they used to.

This development has myriad implications, in our view. For those worried about future spending, older folks don’t stop consuming goods and services when they reach a certain age: They dine at restaurants, travel for leisure and purchase fun things, too. As for who will work, some may decide to push off retirement—or not retire at all by working part time or having side gigs. Combine that with ongoing technologically driven efficiency gains and the upshot: Tomorrow’s economy may be just as productive as today’s—perhaps even more so. Financial Times columnist Merryn Somerset Webb recently shared some sensible perspective on this:

“Think of robots and artificial intelligence as extra pairs of hands and what’s the problem? Productivity might be about to soar—something that makes miserable mutterings about dependency ratios entirely redundant: if the worker of 2040 can produce three times as much as the one of 2020 what matter if he has two more high-spending oldies to produce goods for?”^[viii]

Perhaps that, plus their slow-moving nature, is why demographic shifts don’t tend to impact stocks much. Demographic changes manifest gradually over many years—even decades. They are a long-term structural issue nearly everyone sees coming long before population changes actually arrive, sapping any potential negative surprise power. Stocks care more about cyclical drivers—e.g., the economic environment in the foreseeable future. Issues like falling birth rates don’t materially alter the economic and political factors that impact corporate profits over the next 3 – 30 months. Just consider recent history. America’s (and most of the developed world’s) demographics allegedly stunk all throughout the last bull market—it was, uhh, history’s longest. The US led. Emerging Markets nations with allegedly “better” demographics overall lagged.

Moreover, many conclusions about falling birth rates’ distant economic impact rest on long-term forecasts that often extrapolate recent trends ahead. As smart as these projections may look today, far too much can change in the next 5 years, let alone 20. Since that distant future is unknowable, basing portfolio changes on developments that won’t play out for many years—if at all—strikes us as unnecessary and quite possibly unwise.

Declining birthrates and the feared negative fallout have been in and out of financial headlines for years. As dire as some of the conclusions may sound, we don’t think this time is different—demographic trends don’t derail or buoy markets either way.