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

One predicts retiring boomers will muzzle equity prices for years; the other doesn't
AUG 16, 2011
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.

Latest News

RIA dealmaking accelerates as three firms hit AUM milestones
RIA dealmaking accelerates as three firms hit AUM milestones

Wealth Consulting Group, Coastline and Maridea report fresh capital, acquisitions and asset growth as advisor M&A keeps climbing

VastAdvisor closes $1 million SAFE round from advisor-side backers
VastAdvisor closes $1 million SAFE round from advisor-side backers

Carson Group's Dani Fava, Jason Pereira of Woodgate Financial, and Sally George of Convergency Partners led the raise as the growth-tech startup builds out its AI platform and leadership bench.

Wells Fargo adds three advisor practices as recruiting rebound continues
Wells Fargo adds three advisor practices as recruiting rebound continues

New teams from William Blair, Ameriprise and UBS bring more than $560 million in combined client assets to the firm's employee and independent channels.

UBS will pay advisors 'handsomely' for banking starting next year
UBS will pay advisors 'handsomely' for banking starting next year

Regulators this year approved UBS Bank USA’s conversion to a nationally chartered bank.

SEC accuses Tricolor executives of hiding $800 million collateral hole
SEC accuses Tricolor executives of hiding $800 million collateral hole

How a subprime lender’s car-loan bonds allegedly unraveled before bankruptcy.

SPONSORED Direct indexing webinar targets tax-loss harvesting amid market swings

Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains

SPONSORED Who builds the income when the pension disappears?

Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income