See the graph to the left , taken from the letter: M/O is the ratio of middle aged to onetime , as well as P/E is the stock marketplace price-earnings ratio.
It seems similar a natural story: In the 1970s , in that location were relatively few prime-age savers closed to to purchase stocks , as well as the prices fell. Starting inwards the 1980s to belatedly 1990s , boomers entered their prime number saving years , bought stocks as well as drove the prices up. And directly that the boomers are retiring , they get-go selling , as well as picket out for prices! Zheng as well as Mark brand a pretty discouraging forecast.
These facts dovetail alongside enquiry (my summary here , but lots of people lead hold made this point) that high price/earnings ratios agree to lower subsequent returns , as well as depression price/earnings ratios correrpond to higher subsequent returns. One choice storey is that depression prices come upward when people hold off depression increase inwards cashflows , as well as high prices come upward when people hold off amend time to come cashflows. That storey does non plough out to last truthful on average. So the buying as well as selling pressure level sentiment is consistent alongside those facts.
I'm soundless non convinced , withal , for a few reasons (all completely acknowledged past times Zheng as well as Mark -- no fighting hither , we're simply dissecting the evidence). First , empirically , movements inwards stock prices are most the equity premium , how much more yous hold off to earn on stocks rather than bonds , non the overall degree of returns. Stock prices are most the willingness to bear risk , non most saving or dissaving. If it's all most saving as well as dissaving , nosotros should encounter bond prices as well as yields (adjusted for expected inflation) displace correct along alongside stock prices as well as expected returns. To build a demographic theory of stock prices as well as returns nosotros lead hold to struggle non that people desire to salve to a greater extent than inwards middle historic menstruum , but that they larn less risk averse inwards middle age. Maybe , but it's a dissimilar story.
Second , markets are internationally linked. There may non last whatsoever American savers to sell your stocks to when yous retire (especially if the taxation of investment returns rises sharply). But in that location volition soundless last a billion Chinese!
Empirically , yous tin encounter in that location are most 3 information points , as well as Zheng as well as Mark admit playing a flake alongside the demographic data. Lots of other things generate the same correlation alongside P/E ratios. In my enquiry , I've been emphasizing the link to economical weather condition that yous tin likewise encounter inwards the P/E plot -- proficient prices inwards proficient times , bad prices inwards times of recession or stagnation.
However , this is likewise a to a greater extent than of import enquiry than people think. Stocks earned most 8% existent as well as most 6% or then to a greater extent than than bonds over the long histories of information nosotros lead hold , starting inwards either 1926 or post WWII. Many people bake inwards the thought that nosotros volition maintain to larn slap-up returns similar these inwards the future. Many pension funds discount in that location liabilities at these high rates of return.
Maybe , mayhap not. There are lots of stories that the expected provide on stocks for the side past times side 20-30 years could last a lower. Wider participation via index funds as well as 401(k) -- wider peril sharing -- is one. Demographics , whether local or global , are another. The peril that nosotros volition come inwards a few decades of deadening economical increase is another.
"Who volition yous sell your stocks to when yous retire?" is an of import question. With express information , thinking through the diverse stories to encounter if they brand feel is the exclusively agency to brand much progress.
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