Population and markets

Anybody that knows me is aware of the importance I place on population metrics in the sphere of economics. We do not get demand without people. Supply does not just miraculously appear, people work and make goods and services. So it is not overstatement when I say there are fundamental ways that people matter for economic outcomes. Every so often though, we go into an odd place. I recently attended a presentation by a Chief Economist for a mutual fund company and he showed a graph qualitatively similar to the following,

S&P 500 & Population Aged 25 to 54

S&P 500 & Population Aged 25 to 54

Not the age range used was different, I will admit. I believe the age range displayed was 25 to 34 or something of that sort. There was also a projection of increasing numbers in the age range. The point still remains the same though, the notion was that there was some correlation between the number of people in an age range and the level of the S&P 500 index. This type of thinking scares me. This sounds very much like the suggestion that housing prices do not fall on a nationwide level. Until they did.

The suggestion I think is that these are prime years for individuals to buy into the equity markets. So long as the number of people is increasing this should increase demand side strength and allow prices to continue to rise. I have my doubts.

I am not going to dispute the increasing number of younger people, but I do think we need to recognize what else is out there as far as population factors. If these younger people are looking to buy in, then who is looking to sell? Obviously one would look at the baby boom generation and their large numbers. So it might be natural to look at the S&P 500 performance and the ratio of young to old, which I provide below.

S&P 500 and the ratio of Population aged 25 to 54 to 55 and over

S&P 500 and the ratio of Population aged 25 to 54 to 55 and over

One of the things we see here is that the young are declining in relation to the size of the old. Instead of 2.5 young for every old there is now 1.5. This would seem to indicate some increased sell-side pressure that may not have existed in previous periods.

To be clear, I do not think this indicates imminent falls in equity index values, rather it is going to be the case that fundamentals such as earnings start to drive prices on a regular basis. There is simply not going to be the number of young looking to buy in that generated buy side pressures and price increases such as in the 1980s and 1990s.

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