The US economy is cranking – unemployment is dropping and wages finally appear to be rising. More people are feeling flush and major IPOs are coming through the pipeline – Zoom and Lyft went public and Uber, Airbnb and Slack are on deck. This bull market just turned 10 and we’re currently enjoying the longest bull run since World War II.
Many experienced investors are concerned that we’re due for a correction, but it also feels like we’re being conditioned to expect quick rebounds. In fact we just suffered through a 20% correction in Q4 2018 and then enjoyed a complete recovery in Q1 2019.
If we’re lucky maybe we’ll have a 28 year expansion along the lines of the “Australian Economic Miracle”. But with 76 Million Boomer between ages 55 and 76 transitioning into retirement and pivoting to generating income from their assets; you can be sure there are millions of people in the US worried about where the market goes from here and what that means for them.
So which two mega trends could derail their plans?
- Demographics – basically a developed country’s economy and stock market tend to follow it’s population growth curve – positively or negatively.
- Home Country Bias – US investors tend to over-invest in the US stock market vs. international stock markets, which could be problematic since US stock market valuations are near all time highs.
Demographics as Destiny
People, companies and countries all have life cycles – they are born, grow, plateau and then die. A person is born, consumes more as they grow and their consumption peaks around having a family – when they need a larger house, cars, more food, etc; however as people age they need fewer material things leading to lower consumption and spending.
Companies go through similar life cycles and it’s worth remembering that only 53 companies have remained on the F500 list since it was created in 1955. The moral of the story: Diversify.
This goes for countries as well and it’s worth looking at countries who are ahead of the US on the aging demographic curve. Specifically Japan serves as a cautionary tale since the US and Japan have some things in common
This is Japan’s population growth over the past 50 years
This is Japan’s Nikkei 225 over a similar time period.
You’ll notice that the stock market peaked in 1990 just as their population plateaued. Two huge sources of wealth for retirees have gotten hit since then:
- The stock market – 30 years later the Nikkei 225 is trading at roughly half its 1990 peak.
- Housing values also stagnated for about 20 years – although they have recently started to recover with the help of low interest rates.
Of course the US is not Japan, our population is expected to continue growing over the coming decades as opposed to shrinking like Japan, Russia and many EU countries. However, it is worth noting a couple of key upcoming dates for the US per the US Census:
- Starting in 2030 immigration will take over from US births as the growth driver for our population.
- Starting in 2035 for the first time the US will have more people over age 65 than under 18 for the first time in our history.
The point about demographics is that population matters a lot and since our internal birth rate is slowing it’s very important for us to continue to get immigration “right”. Just like a company – the US needs to attract and retain people who want to live, work and pay taxes here in order to remain competitive in the world economy AND pay for social programs like Social Security and Medicare.
Home Country Bias
Meb Faber has recently called out the strong bias that US investors have to invest in our own stock market. It’s hard to fault people for that since we know our economy and companies well, but it’s actually a big risk today since:
- the US market is currently trading at a CAPE (Cyclically-Adjusted Price-to-Earnings) Ratio of about 29
- Historically the US market and Foreign markets have traded at a CAPE of 22
- Currently Foreign markets are trading at a CAPE of about 16
So the US market is trading at almost 2X the world, US Investors are overweight the US market AND we’re facing some massive demographic shifts that could impact the long term trajectory of the US stock market.
What Can You Do?
It’s worth studying some history and looking at other markets (per above). Morgan Housel recently wrote a great piece called “You Have To Live It To Believe It” – noting that how generations invest is shaped by the experiences they have. Children born to the Great Depression and the Great Recession are far more conservative than other generations.
In this country there is a new generation of investors who have mainly seen the market go up and to the right – they may assume and be counting on the market always recovering quickly. Will they be prepared financially and emotionally if there is a 5 or 10 year down turn?
Create a Plan and Diversify – everyone benefits from getting educated and creating their own retirement and financial plan. Additionally people should review their portfolio allocation since it’s the largest driver of long term returns and volatility. The good news is that even if you retire during a stock market peak it can work out if you have a balanced portfolio.
Hopefully this article helps you consider whether you’re positioned to ride out the inevitable ups and downs of the markets and how they might impact your retirement plan. If you want to check how you’re doing – run a quick retirement estimate here.