Baby Boom Market [Fool on the Hill] July 3, 2000

FOOL ON THE HILL: An Investment Opinion
Baby Boom Market

By Rob Landley (TMF Oak)
July 3, 2000

Summary: Baby-boomers have been investing like mad over the past decades, fueling the bull market. But as they approach retirement, expect them to start taking more money out of the market than they are putting in. The result will likely be a return to the days of historic 11% annual stock market growth rather than the surge we saw through the '90s.

I think the baby boomers are responsible for the bull market we've been having. They're probably also a factor in the tight labor market right now.

The baby boom has defined the United States' culture for decades, not just because there are so many of them but because they're concentrated together demographically. When they do something, they do it en masse.

In the 1950s, the country pretended life was like Leave It to Beaver because the defining theme was parents everywhere trying to make the world safe for baby-boom children. In the '60s, rebellious teenage baby boomers gave us the sex, drugs, and rock and roll the '60s are remembered for, along with protest marches and Woodstock and hippies wearing tie-dyed T-shirts while driving around in psychedelic VW Bugs. In the '70s, the baby boomers graduated from college and got entry-level jobs, so the culture seemed dull and oppressive. When they worked their way up to decent careers and started earning real money, they gave us the word "yuppie." Not because they were doing anything new -- simply because so many of them were doing it at once.

In the '80s, the baby boomers were in their 30s, and the TV show thirtysomething was a hit. That's when the more forward-looking of them started saving money, and investing it in 401(k) plans and mutual funds. And the mutual fund industry TOOK OFF. So did the market, which was receiving that money. Valuations of stocks started to rise, with more dollars chasing the same number of investment opportunities, but the extra venture capital this sort of thing provided stimulated growth as well.

The surge of baby-boom employees also fueled corporate growth, and except for a few hiccups like a real estate crash once the baby boomers had all bought their houses and settled down and the real estate growth curve didn't continue ever upwards, life was good. And so passed a decade of greed under the benevolent amnesia of uber-puppet Ronnie Ray-gun.

In the '90s, the baby boomers were in their 40s. In the prime of their careers, they earned a lot of money, and those who weren't already investing realized they were getting older and started REALLY socking it away. Forty also stopped being a taboo age as celebrities like Cher proved that with enough plastic you can still look good, and research into allowing older women to bear children got plenty of funding.

The supply of saved dollars continued to increase faster than the number of investments to put them in, and the dreaded price-to-earnings ratio on the average stock rose to unbelievable levels. But baby boomers continued to save for their retirements, and even an inflated stock market was a better investment than any other alternative. (Although the national debt conveniently grew to absorb any savings baby boomers felt like putting into treasury bonds.) With 401(k) plans maxed out but retirement approaching fast anyway, increasingly savvy and experienced baby-boom investors started flaking away from bloated mutual funds that couldn't find a profitable use for all the cash being poured into them. They started bypassing the funds to invest their extra savings -- beyond the 401(k) plan -- directly in individual stocks.

Now it's the year 2000. World War II ended in 1945, so the oldest baby boomers are 55. The most successful ones have already taken early retirement, and there's that labor shortage. The sheer lack of baby boomers gaining experience and increasing productivity as they move up the organization is also throwing off the growth curves corporations have gotten used to.

The boomers still in the workforce are saving and investing like mad, with retirement only 10 years away and social security unlikely to survive the flood of baby boomer demands on it. That's fueling the bull market, pouring many dollars of investment capital in to chase every dollar of profits and keeping prices at record levels. If the valuation of a stock is three times its historical rate, it's because three baby boomers are fighting for every penny that only one would have owned in pre-baby boomer days. And the sustained bull market has attracted the children of baby boomers, the "baby boom echo," to add our own dollars to the pile.

The interesting part happens in another five to ten years. The baby boomers retire at 65, and start taking more money out of the market than they're putting in. Companies will still be profitable, but valuations will probably contract as more investor cash flows out of the market than in. Barron's will probably have a field day, and point out they've been predicting this every year for the past two decades. (i.e., a broken clock is right twice a day, you can be right 50% of the time by always calling the coin flip "tails," etc.)

What's more, the labor shortage suddenly gets much more intense. Retirement en masse. Mitigating this, we have increasing automation and computerization, and baby-boomer children earning high salaries in a tight labor market.

The baby boomers are like a large wave in a pool. The population of the country isn't shrinking as baby boomers retire, but the concentration we've all gotten used to is changing. The equilibrium we return to is likely to be closer to historic norms of 11% annual stock market growth than the baby-boomer influenced
surge of recent years.

That's my guess, anyway.