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Monday, August 22, 2011

Research: Aging Population will probably lower Stock Market P/E Ratio

by Calculated Risk on 8/22/2011 03:37:00 PM

From the San Francisco Fed: Boomer Retirement: Headwinds for U.S. Equity Markets?

This Economic Letter examines the extent to which the aging of the U.S. population creates headwinds for the stock market. We review statistical evidence concerning the historical relationship between U.S. demographics and equity values, and examine the implications of these demographic trends for the future path of equity values.
[E]vidence suggests that U.S. equity values are closely related to the age distribution of the population. Since demographic trends are largely predictable, we can forecast the path that the P/E ratio is likely to follow in the next few decades based on the predicted M/O ratio.
What does the model say about the future trajectory of the P/E ratio? ... To obtain this future P/E* path, we calculate the projected M/O ratio from 2011 to 2030 by feeding Census Bureau projected population data into the estimated model. Figure 2 shows that P/E* should decline persistently from about 15 in 2010 to about 8.4 in 2025, before recovering to 9.14 in 2030.
There are two diagrams in the economic letter. This is probably another reason many boomers will never retire ...

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