Demographics and Dividends

Demographics plays a major role. It is in the background.

The Baby Boom generation is highly skilled, highly paid and moving toward retirement. I believe that this is behind the steady expansion of multiples that we have seen in the stock market. In addition, there is a part of the expansion that is related to the perverse supply and demand characteristics of financial instruments. Rising prices make stocks more attractive, which causes prices to continue to increase for a long period of time.

This competition for investment dollars has a two fold effect. Because of high stock prices, it forces long-term investment returns downward. Because of low investment returns when compared with historical norms, many Boomers will delay their retirements.

These delays will mitigate the negative effect of Boomer retirements. This invisible hand will mitigate one of today’s greatest economic concerns looking forward: that there will be too few workers to support the elderly. The elderly will be working.

More precisely, many Boomers will work longer than people from previous generations.

Looking at economic issues, today’s job market has a surplus of highly qualified workers. This has reduced the pay of Boomers in view of their skills. But it has improved the health of the economy overall. We see this in the extremely mild recessions of recent years and in very low unemployment rates.

Because many Boomers will remain on the job, today’s strong economy will continue to be strong much longer than most people expect. Productivity will remain high longer. Corporate earnings will continue to be healthy.

Dividends should be secure. We can expect them to rise.

Stock multiples are unlikely to continue expanding as stocks fail to deliver returns far above historical norms. Most likely, stock multiples will contract as Boomers look for better returns elsewhere, following paths laid out by salesmen. This will hurt stock prices. It will not hurt earnings. It will not hurt dividends.

John Walter Russell
I wrote this on 2-10-05.