USA bear market for at least 10 years — a demographic argument

As people get older, they tend to rebalance their savings from equities into less risky assets, then, eventually start withdrawing those funds to replace income lost to retirement or underemployment.

According to research by Zheng Liu and Mark M. Spiegel of the Federal Reserve Bank of San Francisco, as the outsized 1946-1964 “Baby Boom” cohort in the USA gets older, their move out of equities will depress prices.

They write

The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027. On the brighter side, as the M/O ratio rebounds in 2025, we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010.

A possible countervailing force

Foreign countries hold large quantities of U.S. securities, and foreign agents, such as sovereign wealth funds, may alter their mix of U.S. assets in favor of equities. China and other emerging market countries may relax capital controls, which would allow their nationals to invest in U.S. equity markets. These factors could potentially alleviate the adverse impact of U.S. demographic trends on stock markets.


foreign demand for U.S. equities is unlikely to offset price declines resulting from a sell-off by U.S. nationals

Figure 2 of Liu and Spiegel

Projected P/E ratio from demographic trends (Liu & Spiegel, 2011)


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