This feels like a tough time for investors. After all, investing isn’t about what has happened, it’s about what’s going to happen – over the next five or ten years, and beyond. So, here we sit at stock market highs. What now? Sure, the market has been good, but what most investors are wondering is, “What’s next?” Meaning: “What’s the future going to look like?”
No one knows. But we do have some data points to help guide us. One of the most important underlying concepts in investing is demographics. As the saying goes, Demographics are destiny. The over-arching trends in the composition of our population have a huge impact on the demand side of our economic equation.
For instance, will we have more people who need more food? Housing? Cars? Technology? Healthcare? Or will our economy have less demand over time for these things due to a shrinking population?
Thanks to today’s sophisticated data collection methods, we can see in detail which countries are growing and which are shrinking. We can see numbers on life expectancy. We can see numbers on the distribution of age groups. And we can use the numbers to make educated guesses on things like: GDP growth, the stock market, housing and inflation.
So, what does today’s demographic crystal ball indicate about the coming years and decades?
As Warren Buffett says, “Look, the pie gets bigger.” The U.S. and world economies have, on average, grown larger and larger over the past 200 years. The stock markets have ridden those economies’ coattails to ever higher levels.
The World’s Demographic Profile For The Next 30 Years
Here’s a glimpse of the world’s demographic profile for the next 30 years, as identified by the Ned Davis Research Group. For starters, we are at peak population growth now. There are about 131 million births per year worldwide. That’s approximately 360,000 babies born every day. The same study shows that there are 55 million deaths each year, or approximately 151,000 per day.
But, it’s estimated that population growth will continue to slow over the next several decades, as it has done over the past few decades. And, the ratio of births to deaths, or what demographers call the replacement rate, may level out near the year 2100. At that point, the world, which currently has a population of 7.4 billion, will be at 11 billion.
According to researchers David Bloom and David Canning, studies prove that an increasing growth rate in the Mature Working Age Population”- those aged 35-54 – can also profoundly affect Gross Domestic Product. When the Mature Working Age Population increases by just one percentage point, capital GDP growth increases by 1.39 percentage points.
That makes sense as this demographic group contributes a disproportionate amount to economic growth. They have amassed job knowledge and experience, and have hit their productivity stride. As they become empty nesters, these peak-income folks are able to save and invest at a high rate. And that’s good because lower fertility rates among today’s Mature Working Age Population means there will be fewer family members to care for the members of the demo as they age. That, in turn, means job creation in the elder care industry.
As far as stocks and demographics go, it’s clear that growth in the Mature Working Age Population and stock market performance over time are directly proportional. As the labor force grows, so do equity markets in general. Indeed, we often pity countries like Japan that have an aging population. But aging is different from shrinking. So long as a country’s working population gets bigger, it’s good for growth and markets, regardless of the gray factor.
On a related note, while you may have heard that participation in the US labor force is declining, that statistic is misleading. Our total labor force is still growing, but so is the population, so the percentage has just declined, from 66% in 2000 to 63% today. All total, the labor force has grown from 140 million to 160 million.
The Demi-Ashton Mature to Young (MY) Ratio
Let’s look at the same concept through a different framework – The Demi-Ashton Mature to Young (MY) ratio, which targets demographics and stocks. Under this approach, when the mature population (ages 35-49) rises relative to the young workers’ population (ages 20-34), equity markets tend to outperform. The MY Ratio has been almost perfect in identify long-term bull and bear markets since 1950s. And here’s the good news: the MY ratio in the US bottomed in 2016, but it is set to rise for the next 22 years. Globally, the MY ratio will rise until 2035. All very good news for stocks.
So, as another old saying goes: Our population isn’t getting older, it’s getting better – and better for the economy!