Stocks over the next decade: Fed, GAO see very different pictures

Depending on which government report you read, the stock market either will take a dive once baby boomers sell off their stocks — or it won't. The Federal Reserve Bank of San Francisco added fuel to this month's market volatility with the release of a research letter theorizing that retiring baby boomers will hammer the stock market as they sell off their stock portfolios. That report said the dampening effect could last for at least a decade. The Government Accountability Office, however, came to the exact opposite conclusion in 2006. In that report, the GAO said that boomer retirement “is unlikely to precipitate dramatic decline in market returns.” How did we get from that to the 13% stock market drop the San Francisco Fed predicts? Here's how. The problem, according to the San Francisco Fed's research note, is that baby boomers will finance their retirement by selling off their stock holdings, which “portends poorly for equity values” over the next two decades. They theorize that stock prices will decline about 13% from their 2010 level to 2021, with recovery coming in 2025. In a chart, the researchers project that the price/earnings ratio for U.S. stock prices will dip from an average of about 15 points in 2010 to about 8.4 in 2025, before recovering to 9.14 in 2030. After dropping 13% from 2010 to 2021, stock prices should begin to recover, the authors theorize. By 2021, the value of equities should be about 20% higher than in 2010, assuming an average 3.42% annual earnings growth rate. But in 2006, the GAO found plenty of reasons to dismiss those fears. A large percentage of invested assets belong to high-net-worth investors, who typically do not spend down all their savings in retirement. The large majority of boomers have “few financial assets to sell,” and won't shock the market when they do. Other factors arguing against a big drop are that many retirees continue to accumulate assets, or spend them down slowly, over a long retirement. Others are expected to work later in life. Globalization of markets also will help even out returns, the GAO's report said. “Researchers and financial industry representatives largely expect the baby boom retirement to have little or no effect on stock and bond markets,” the GAO concluded.