Episode 10 – Will There Be Enough Investors to Buy Stocks from Reitiring Baby Boomers?

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Hello, everybody. Thank you for tuning in to Market Perspectives, a Mercer Advisors podcast where we provide a data-driven, common sense perspective on the economy, on markets, and on investing. I’m your host, Don Calcagni, chief investment officer at Mercer Advisors.

Today, we’re going to discuss population growth and what the future demand looks like for stocks. There’s this question around whether or not there will be enough people to buy US stocks as the baby boomers retire. And this is a fair question. When we step back and we actually look at the data over the past several years, what we see is that, globally, population growth has come down dramatically.

At the moment, global population is growing. It’s somewhere around 1.1% annually. And in the United States, it’s even lower. In 2021, the US population grew by only 0.1%

It increased a bit to 0.4% last year in 2022.

So again, back to the question. There’s this concern, there’s this sense that here we have the baby boomer generation, which is a very large generation in terms of numbers, beginning to retire. And there’s this thinking that, gee, they’re going to start selling off their assets to start funding their retirement. And, gee, will there be enough people to purchase those assets?

So let’s take a look at the data. That’s the whole purpose of this podcast. And so let’s see what that looks like.

So when we just look at the US population, we have six different generations. We have the greatest generation that was born between 1916 and 1928. There’s about 1.75 million of those folks. That’s naturally the smallest generation at this point when you look at the demographic breakdown of the US population,

We then have the silent generation. Those are folks born between 1929 and 1946. And there’s about 24 million of those individuals in the silent generation population.

We then have the baby boomers. There’s about 68.7 million baby boomers. And for a very long time, until recently, the baby boom generation was the largest generation. And I think that’s part of where this misperception comes from that, gee, if the boomers are the largest generation and they begin to sell off US stocks, for example, are there going to be enough people to buy those? And the short answer to that is yes, there are plenty of humans on planet Earth to buy those stocks.

But let’s get back to the different generations. We then have Gen X. I’m a member of Gen X.

These are folks born between 1966 and 1981. Generation X is often referred to as the forgotten generation. We certainly feel that way sometimes.

We then have millennials. All right. We have millennials.

There’s 82.2 million millennials. So there are more millennials than there are boomers. Millennials are those folks that were born between 1982 and 1999.

Now, I want to pause here for a moment because when I’m at Thanksgiving dinner, I’ll often hear family, perhaps, make a comment or two about those millennials and refer to them as if they are still in grade school or middle school or high school. Well, that’s not really the case. The youngest millennials today are 24 years old. The oldest millennials are in their 40s.

So we are talking a large generation 82 million people who are now in the workforce. They are earning they are beginning to fund their IRAs and their 401(k)s. So again, 82 million millennials versus 68 million baby boomers, 65 million Gen Xers.

The Gen Xers, we’re in our 50s at this point, 40s, 50s. And we’re clearly in our peak earning years or entering our peak earning years. And we’re funding IRAs and 401(k)s.

So Gen Xers, 65 million of us. Millennials, 82 million of us. Right there is a significant number of humans, about 147 million American Citizens, who are of prime age to be buying those assets that baby boomers, in theory, might begin to be selling off to fund their retirement. And I’ll come back to that in a moment.

We then have Gen Z. This is the youngest generation born between 2000 and 2020. This is actually the largest generation in terms of the number of people, 86.4 million members of Gen Z.

And if you think about this, the oldest members of Gen Z are now 23 years old, graduating college, entering the workforce. By the way, this is the most highly educated generation in American history. And I’ll come back to that in a few moments because there’s this conversation that we should have around where does economic growth come from. How is the US economy going to grow if our population is not growing at a very high rate?

But if we just step back and look at the different members of these generations between Gen Z, 86 million; millennials, 82 million millennials; Gen X, 65 million Gen Xers, that is a significant number of humans. That’s about 234 million humans that are out there to purchase bonds or stocks from baby boomers, the 68.7 million boomers. So if you think about it, between Gen X, millennials, and Gen Zers, there are 3.4 times as many members of those three generations than of the baby boomers.

To say it differently, baby boomers make up only 21% of the US population, and 71% of the US population consists of Gen Z, millennials, and Gen Xers. So that is a significant number of workers who are entering the workforce or will soon be entering the workforce, or already in the workforce that are funding IRAs and 401(k)s that are available. And by any measure, they indeed are purchasing those assets.

They’re buying stocks. They’re buying real estate. They’re buying bonds. So there’s still significant demand out there when you look at the number of investors just inside the United States. This is an important point.

These markets–

global markets, stock markets, bond markets, real estate markets–

these are global markets. There are investors the world over that are buying US stocks. And so I think the right way to have this conversation is to understand what is the breakdown of the global population when it comes to the age structure of our demographic.

And when we look globally, there’s about 8 billion humans on planet Earth. And yes, population growth has come down dramatically to about 1% annually. Putting aside the climate and environmental benefits that accompany that reduction in population growth, it does beg the question around economic growth, which I’ll get to in a moment.

But when we look at the 8 billion humans on planet Earth, there are 5 billion humans that are under the age of 40. There are 2.6 billion humans that are under the age of 20. So globally, when we look at the age structure of the human population, there is still a significant number. It’s actually over 60% of human beings on planet Earth are under the age of 40. About 83% of all humans on the planet are under the age of 60.

So are there enough humans, are there enough people to buy US assets as the baby boomers retire? I think the answer to that unequivocally is absolutely yes. Yes, there are plenty of humans, plenty of investors available to purchase US stocks, bonds, and real estate from these 68 million baby boomers as they retire.

Now, we can’t have this conversation without acknowledging that baby boomers should not be selling all of their stocks the day that they retire. Let’s just say, you retire at age 65. You need to think about that for a moment.

At age 65, you’re retiring and you have a life expectancy somewhere between 80 and 85 years. And that’s the average life expectancy.

So if you think about what that means, if you’re retiring at age 65, you very easily could spend 20 years or more in retirement. That is a very long-term investment horizon. And as any financial planner will tell you, one of the biggest threats to your economic freedom, to your long-term financial security is the erosion of your purchasing power due to inflation. And stocks are the absolute best long-term investment to hedge against inflation.

And so folks retiring at age 65 or even at age 70, I would argue you still very much should have an allocation to stocks in your portfolio. So I would caution against being in a rush to sell out of stocks the minute you turn 65 or age 70. Like I said a few moments ago, asset markets are global. US stock markets are certainly global, and non-US investors love owning non-US assets.

Well, what’s the evidence for that? Well, if we just look at the valuation of US stocks relative to their non-US stock counterparts, we see that US stocks trade at somewhere between a 30% to as much as 50% premium relative to stocks in non-US markets. That is evidence that there is huge demand globally for US stocks over non-US stocks.

And so in many ways, that is a subsidy that American stock investors enjoy at the expense of other global stocks. For example, emerging market stocks trade at somewhere around 10 times earnings. US stocks trade at about 19 times earnings. And the stocks of developed countries, think Western Europe, think Australia, Japan, trade at somewhere around 13 to 14 times earnings.

So by any measure, globally, investors strongly prefer US assets to their local stock and bond markets. Doesn’t mean that they still don’t invest in their local markets. They absolutely do.

But all things equal, they have a preference for US assets. And so again, that is evidence of very strong global demand for these very assets that some boomers might be concerned that there may not be enough demand for those. And my point is, when we look at the data, when we look at valuations, when we look at population demographics, there is obviously significant demand today and into the foreseeable future for their US stocks.

Now, there’s this question around gee, well, if the population growth has come down so much and it’s somewhere around 0.1 in the United States and perhaps it’s 1% globally, how are we going to grow our economy going forward? This is a very real and a very serious policy question for policymakers, for firms that manage pensions. So this is not an issue that I would gloss over lightly. It is important for us as a society to think through, how are we going to manage our economy over the very long term, given that population growth has come down so dramatically?

There are certainly very positive environmental benefits to slowing US and global population growth. But this question around economic growth, economic growth is a function fundamentally of two things. Number 1 is population growth, hence the concern by policymakers, given that population growth has come down. Number 2, it comes from productivity growth. So those two things together should equal your real, meaning inflation adjusted economic growth.

So if population is growing globally at 1%, we should expect the economy to grow by 1%. But then also this question around productivity growth. Productivity growth refers to how much output can each worker produce given their education, given the technology that they have at their disposal.

I think it’s no secret that a worker today, regardless of what you do for a living, whether you work in an office, whether you work in a Ford Motor Company plant in Michigan, today, workers can produce significantly more than investors could 10, 20, 30, 50, hundreds years ago. That much is obvious. And I think we accept that as true because of our technology. If we go back 20 or 30 years ago, before the advent of the personal computer, I think we would all agree that we are more productive today than we were 20 or 30 years ago.

So productivity growth, let’s just say, each year we’re producing 1% more than we did in the prior year, due in part to education improvements or due in part to technological advances.

If population is growing at 1% and productivity growth is growing at 1%, we should have economic growth of about 2%. This is why it is critically important, in my view, that we are investing heavily in education, especially STEM-related education, but education broadly, not just at the university levels but also at the younger levels. Elementary education and even preschool and daycare levels, I think is critically important for us as a society if we really want to enhance the long-term economic growth of our economy and improve the overall financial health of our society.

So we have to invest in education, especially STEM, but we also have to continue to invest in technology. This is a year where we have seen AI/artificial intelligence-related stocks do exceptionally well. And investors the world over are clearly very excited about the prospects of these AI-type stocks. Think of a company like NVIDIA.

And so I think we need to continue to invest in those areas to enhance worker productivity. And that ultimately will continue to help our economy to grow. Just this year, the US economy is forecast to grow somewhere between 1.5% and 2%, depending on how you do the math and depending on which analyst or which investment bank you listen to, somewhere between 1.5% and 2% real economic growth. That’s after you strip out any inflation.

The majority of that is coming from productivity growth. So I would not underestimate the impact of productivity growth on economic growth over the long term. So we can grow our economy long term. We can certainly do that.

And number 2, back to this question, will there be enough people to buy US stocks as the baby boomers retire? As I said a few moments ago, absolutely, yes. Not just here in the United States, but globally, there are many, many people willing and obviously are actually buying those assets in global markets.

Well, that’s all for today. Thank you for listening. And should you have any questions, please feel free to reach out to your advisor here at Mercer Advisors. I’m Don Calcagni, and we look forward to seeing you next time. Thank you.

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