Mark Hulbert reported recently on a demographic study from Ned Davis Research which highlighted a little known demographic shift that will happen in the US. We are all well aware of the aging population in the US. But what many are not expecting is that the US will become a very young country by 2020. By then, an increasingly large part of the total population will be under 15 years old.
So the population of the US will be like a barbell – the young and the elderly at each end anchoring the other. The part of the population that will be shrinking is the middle-age section. This is something that I touched on previously through a discussion of the MY ratio (middle to young ratio). This is how demographics effects the stock market directly.
A chart of the ratio of those middle-aged and those young has an unbelievably good track record for predicting the price earnings ratio of the stock market. And since the vast majority of the total return from the stock market comes from price earnings expansion, this provides us with a very good guide for future stock market returns. Of course, this is a long term and macro guide. It is not suitable for navigating the short-term gyrations of the market.
Here is a chart from a research paper written by Favero, Gozluklu and Tamoni illustrating the relationship between stock market returns and the MY ratio:
As you can see, the MY ratio is expected to fall until around 2014-2015. This suggests that the bear market we are in still, will last until then. Such a timetable dovetails with two other cycles. The first being the 18 year cycle of secular stock markets or the Benner Cycle. And the second, the stock market and commodity cycle. If we start at 1999 for the bottom of the previous commodity market bear and inversely, the top of the equity market bull market, then an 17.6 year cycle would take us to appx. 2016, very close to what the MY ratio is suggesting.
After that, the MY ratio is set to begin a new upward cycle. This suggests a new secular bull market that will last about 10-15 years. Note however that the MY ratio is only rising a small amount relative to the huge rise from 1980 to 2000. This would suggest that the bull market we’ll see won’t be as unbridled as the last secular bull market.
Beyond the more long-term implications that I’ve touched on briefly above, the changing demographic shift will also provide other, more short-term opportunities. Here’s a video with Mark Hulbert discussing the implications of the demographic forecast.