As soothsayers and strategists gaze into 2010, one statistic on the retiring baby-boom generation makes anxious reading for stock market bulls.
The share of the U.S. population aged between 40 and 65, when people typically prepare for retirement by building their biggest pile of financial assets, peaks in 2010 and this ratio has shown an uncanny link with real equity prices for 40 years.
In snapshot, 78 million Americans were born between 1946 and 1964 and by the mid-1980s earned half of U.S. personal income.
This outsize population cohort, swollen by global baby booms as World War Two ended in 1945, is typical.
The proportion of the global population over 60 is set to double by 2050 to 21.8 percent. As birth rates fall and people live longer, ratios of retirees per worker is likely to soar.
Yet the U.S. ratio of those in prime savings years to the sum of under-40s plus those 65 and over is marked by a glaring market correlation and an obvious 2010 milestone.
Goldman Sachs, for example, points out the stock price funk of the 1970s coincided with a three point fall in this key ratio. And its sharp 15 point rebound from 1982 to next year straddled an 18-year bull market on Wall St .SPX.
After 2010, it is set to decline once more and is forecast to sink six points over the next two decades.
Comparison with Japan, whose aging profile is more advanced than those of western economies, packs a more ominous warning.
When the prime savings age group topped out there in the early 1990s, Japan's Nikkei 225 .N225 entered a 20-year bear market that has more than halved stock prices since then.
WORRY OR NOT?
For all the seeming risks, these numbers are not the stuff of daily research -- still transfixed by the credit crisis and dramatic slump and recovery of equities over the past two years.
Many caution against overly simplistic conclusions.
Goldman notes that equity holdings are skewed toward the wealthy, who bequeath much of their assets. Demand from sovereign funds in developing nations will likely absorb some of the extra supply. And workers are also retiring later in life.
The concern is there's a drop in savings as such a major portion of the population retires, like what happened in Japan. But there are caveats where the U.S. is concerned, said Eric Chaney, chief economist at AXA Investment Managers in Paris.
For one, it's not clear when exactly people will choose to retire in the current climate and, unlike U.S. retirees, Japan's situation was exacerbated by the fact workers there receive a fixed sum upon retirement that they then invest and live on.
Chaney also notes the big drop in U.S. net wealth during the recent credit crisis and said this has given savings a sharp boost that could well endure for five years or more.
However, bonds rather than equities could be the main beneficiary of this, at least initially. Savers' growing risk aversion approaching retirement could boost domestic demand for U.S. Treasury bonds -- just when the government needs to borrow most and foreign creditors are growing wary of U.S. debt.
And this asset re-allocation may already be well underway in many countries. Consultants Watson Wyatt estimate the share of bonds in the world's biggest pension systems has nearly doubled to 40 percent since 1998 -- a fact that also helps explain how Japan's government was able to amass debts of near 200 percent of national output without destabilizing its bond market.
A SENIOR MOMENT?
Whether the age ratio is a prophecy or fallacy, the importance of pension activity to markets is clear.
Although some 20 percent was wiped off pension fund assets by last year's equity crash, Watson Wyatt said there were still more than $20 trillion in pension assets in the top 11 countries at the end of 2008 -- up more than 40 percent in 10 years and more than 60 percent of their countries' annual output.
And the Asset Meltdown Hypothesis, where retiring boomers stop buying stocks and bonds and then start to liquidate these assets to fund their retirement, been debated for years.
In 1989, Harvard economist and former White adviser Greg Mankiw joint penned a paper warning of an impending bust in real U.S. house prices due to the aging population profile.
For 16 years, reality appeared to rubbish his thesis even if the recent real estate implosion now prompts a second look.
Many have followed the theme.
A study by the Organization for Economic Cooperation and Development late last year established a relationship between population shifts and asset prices but said it may not be all that strong. Any rapid demographically-induced asset meltdown appears to be highly unlikely, it concluded.
In theory, at least, markets should be forward looking and efficient enough to have already incorporated the shift into current prices, the OECD economists argued.
But the paper added: While a rapid asset meltdown is highly unlikely, such an outcome cannot be completely ruled out.
The recent financial turbulence has highlighted that financial systems are prone to occasional turmoil and that triggering events are difficult if not impossible to foresee.
(Editing by Ruth Pitchford)