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YOU DECIDE: Can age explain the stock market?

October 05, 2007

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

For some, the stock market is a game, for others, a serious business.

Whichever is the case for you, or even if you don't care, it is a part of our economy - and life - that receives considerable attention. Every hour, news broadcasts quote the direction of stocks and big changes in the market bring forth elation (if stocks are up) or dire warnings (if stocks are down).

Ever since the first stock market was organized, investors as well as observers have tried to predict its direction. This year those predictions have been difficult to make because the market has been all over the map: up, then down, and most recently, up again. Any honest student of the stock market will tell you that short-term predictions are very hard to get right.

But what about longer-run forecasts?

Sure, there will be plenty of special happenings and unexpected events moving the market over weeks and months and making its trends nearly impossible to anticipate. Yet over much longer time periods - years and even decades - aren't there some fundamental forces pushing stocks one way or the other?

There are a group of stock market analysts who think such fundamental forces do exist, and if those forces are tracked, they can tell investors when to be in the market and when to be out. The projections based on these forces won't necessarily give the exact dates of market highs and lows, but they will put investors in the neighborhood of those benchmarks.

What are these fundamental forces?

Well, one is age, specifically, the age structure of the country. The reasoning goes like this. Stock market movements are based on the financial forces of companies issuing the stocks. Companies do well when consumers are both buying their products and services as well as investing in their stocks; companies do poorly when consumer spending and investing are sluggish.

Over the long sweep of time, what determines the degree to which consumers buy and invest?

If you're thinking "age," you're right. For a young person just starting a career, income is tight and spending and investing will be relatively modest. When that same person hits middle age and is typically at the top of their earnings profile, spending and investing rise. Then as they move into retirement and are forced to live on a pension, frugality in spending again takes over and investments are cashed in to augment income.

The implication is that the age structure of the country - what percentages of people are young, middle-aged and elderly - will be a big determinant of aggregate spending and investing and therefore will be a major force behind the stock market. Importantly, countries with a large and growing percentage of persons in middle age - roughly between 45 and 55 years old - will have rising stock markets. Conversely, countries with a shrinking percentage of persons in middle age will have stock markets going in reverse.

This is a simple theory of the stock market, and one that makes common sense. Many books have been written promoting this idea, claiming it has worked in the past and will work again in the future. Incidentally, based on the coming aging of the large Baby Boom generation in the U.S. and their movement into retirement, followers of the theory believe the U.S. stock market will peak later this decade and then fall into a 15-year slump.

But before you tell your broker to sell all your stocks in 2010, realize that not all students of the stock market are on board with these notions. Detailed research that considers many determinants of stock market movements has generally found the age structure of a country matters, but in a minor way. Other economists point out that in today's globalized financial system - where people from all over the world can invest in any country's stock market - the age structure of any particular country matters less.

What's the bottom line?

It's that age is important to the stock market, but age is not the driving force. It's only one of many. This really puts us back to where we started, realizing that many factors move the stock market, and unfortunately, often move the market in unpredictable ways.

Then again, maybe you'll decide this is what puts the fun into stock market investing!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html

Posted by Dave at October 5, 2007 08:24 AM