Dow Jones at 11,000 Might Not Be That Low

Here is an interesting article from the Federal Reserve Bank of San Francisco on the potential effects that demographic changes could have on the stock market in the US over the coming decades. As baby boomers retire and sell their assets, including stocks, their prices are likely to go down. The issue is not new and has been debated before but what is novel in their research is the correlation between a standard measure of the demographic composition of the population and the price-earnings ratio in the stock market.

The image below shows the price earnings ration (P/E) and the ratio of the middle-age cohort (age 40-49) to the ok-age cohort (age 60-69). This is labelled as M/O in the chart. There is a clear correlation between the two series.

And if we look forward, this is what their paper predicts:

Their model generates a return of the P/E ratio to the low levels of the late 70’s early 80’s.

There remains, of course, uncertainty about this prediction given that it relies on many factors (such as demand coming from other countries, changes in retirement age), but the correlation of the first figure provides a strong enough argument so that the issue cannot be ignored.

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About Antonio Fatás 136 Articles

Affiliation: INSEAD

Antonio Fatás is professor of Economics at INSEAD. He is a Research Fellow at the Centre for Economic and Policy Research in London and has worked as external consultant for international organizations such as the International Monetary Fund, the OECD and the World Bank.

He teaches the macroeconomics core course in the MBA program as well as different modules on the global macroeconomic environment in Executive Education. His research is focused on the study of business cycles, fiscal policy and the economics of European integration. His articles appear in academic journals such as the Quarterly Journal of Economics, Journal of Monetary Economics, Journal of Money, Credit and Banking, Journal of Public Economics, Journal of International Economics, Journal of Economic Growth, European Economic Review or Economic Policy.

Professor Fatás earned his M.A. and Ph.D. from Harvard University, and M.S. from Universidad de Valencia.


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