Boomer Outflows25 May 2016

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Market Update

Aging + Markets: Theory

Aging + Markets: Reality Today

Scenario: Boomer Outflows

Boomer Outflows

NEW

HiddenLevers

MARKET UPDATE

Market Update

sources: HiddenLevers, Marketwatch 1 2, Houston Chronicle

Oil bankruptcies mounting

China: Kids are all right

Uber self-driving

cars

HiddenLevers

AGING + MARKETS: THEORY

Aging + Markets: Schools of Thought

• Key Proponents: SF Fed Researchers, Research Affiliates, Harry Dent

• Claim a relationship between aging and market P/E

• Claim other countries show negative returns corresponding to age

• Key Proponents: MIT Prof. James Poterba, Vanguard research team

• Claim weak relationship between aging and equity performance

• Boomers won’t really sell a high percentage of stocks

Optimists Pessimists

sources: Vanguard, NBER, SF Fed, Research Affiliates

Aging + Markets: Optimistic View

sources: Vanguard, NBER

The relationship between increases in % of retirees and stock returns is weak at best

NBER study found no relationship between stock prices and aging, and a mild relationship between P/E and aging

Terrible R2

Aging + Markets: Pessimistic ViewResearch Affiliates Data from 60 countries, model market return by age group

Found strong negative impact for 65+ age group

SF FedModeled P/E vs ratio of middle age to old in USA

Found that P/E tracks with larger middle aged group

Model indicates market P/E may fall until 2025

sources: SF Fed, Research Affiliates

HiddenLevers

AGING + MARKETS: REALITY TODAY

Reality: Demographic Snapshot

sources: HiddenLevers, US Census Bureau, Populationpyramid.net

worker base shrinking

1980 2025

Working Girl

GoldenGirls

Reality: Baby Boomers + US Equities

• Boomers at age 40 Begin equity investing

• Market up 614%

• Boomers at age 60• Reduce Equities• Market up 61%

sources: Vanguard, Google Finance

S+P Logarithmic Return

Will returns get worse as Boomers age?

1985-2000 2005-now

Reality: Gen X + Millennials Investing?

Activity Boomers MillennialsMarriage Age 23 30Household Formation(18-31) 56% 23%% with college degree 25% 38%Investment Vehicle 401(k) Robo

Millennials Delaying life

Burdened with debt

Don’t trust stock market

Equities held by Boomers age 46-64

Young Boomers did not own equities

sources: AmericanProgress, Goldman Sachs, Vanguard, Bloomberg

Reality: Mitigating Factors (Demographic)

sources: HiddenLevers, SF Fed, Forbes, Zacks

Boomer retirements

coming slowly(over 18 years)

Boomers living longer

+still investing

Boomers need to invest due to lost savings in

2008 crisis

Reality: Mitigating Factors (Market)

sources: HiddenLevers, SF Fed, Forbes, Zacks

Globalization of US Stock Market

Wealth Concentration1% of Boomers owns 1/3 of Boomer assets

10% of Boomers own 88% of Boomer equities

20% of Boomers own 96% of Boomer equities

Perpetually Low Rates

+Low Yields

HiddenLevers

SCENARIO: BOOMER OUTFLOWS

Scenario Update: Demographics Emphasis

Boomer Outflows

Immigration Fight

GOOD: Millennials Fill Gap

source: HiddenLevers

Younger investors make up for Boomer outflows

Fixed income fruitless for

Millennials/Gen X

Wealthy Boomers don’t need to sell

Foreign demand continues

EM outflows seek shelter in US

equities

BAD: Gradual DeclineBoomers living longer + not retiring = no quick drain

source: HiddenLevers

lofty valuations unsustainable

PE decline25 20

gradual equity sales don’t

compress PE

Millennial entry delayed

UGLY: Mass Exodus

PE decline25 15

source: HiddenLevers

Boomers liquidate equities to fund retirement

worker/retiree ratio falls sharply

2010 forecasted decline now 5 years late

Scenario: Boomer Outflows

Good:Millennials

Fill Gap

Bad:Gradual Decline

Ugly:Mass Exodus

Market P/E

15S&P

-40%

Market P/E

20S&P

-10%

Market P/E

25

Millennials begin to enter equity markets, filling the gap left by aging boomers. Wealthy boomers hold 90% of equities, making excess sales unlikely.

The gradual decline in Boomer market participation is offset by younger investors, but market valuations cannot maintain current lofty levels.

Boomers do shift away from equities, lowering demand for stocks and compressing S&P P/E to 15 by 2020s.

S&P

+35%

Boomer Outflows – Take Aways

Low interest rates force everyone into equities

2008 Financial Crisis made Millennials distrust Equity markets

10% of Boomers own lion’s share of Boomer equities

S+P PE Ratio will compress if Boomers start liquidating