Why America's aging population will be a problem for stocks — and your retirement

According to research correlating the "Middle-Old ratio" (M/O ratio) with stock market performance, U.S. equities may face headwinds starting in the early 2030s due to an aging population; the M/O ratio, calculated by dividing the number of those aged 40-49 by those 60-69, is projected to decline after the mid-2030s, historically indicating slower stock market growth. Yale economist John Geanakoplos suggests demography provides a potential explanation for alternating 20-year boom and bust cycles since WWII. Investors may consider reducing equity exposure and overweighting emerging markets, particularly in Africa and Asia, which are projected to have higher M/O ratios.

Analysis

Demographic trends, specifically the "Middle-Old ratio" (M/O ratio) comparing the 40-49 age cohort to the 60-69 cohort, present a significant long-term headwind for U.S. stock market valuations, according to research highlighted by Mark Hulbert and Yale economist John Geanakoplos. This M/O ratio, which has historically correlated with major market cycles such as its peak in 2000 aligning with the dot-com bubble's end and its subsequent decline during the period of the global financial crisis, is projected to rise until the mid-2030s before entering a sustained decline through 2050. This trajectory suggests U.S. stock market growth may slow commencing in the early 2030s. While not a precise short-term timing tool, as evidenced by its lag after the financial crisis and inability to predict the 2022 bear market, the M/O ratio's correlation with multi-decade boom and bust cycles is considered robust. Projections indicate that the U.S. will experience a more significant decline in its M/O ratio compared to other developed nations, while many emerging markets, particularly in Africa and Asia, are expected to see rising M/O ratios, presenting potential relative investment opportunities.

Key Decisions for Investors

• Long-term investors, particularly those a decade or more from retirement, should consider a strategy of gradually reducing U.S. equity exposure over the next decade, potentially to levels below traditional target-date fund glide paths, in anticipation of demographic headwinds impacting returns from the early 2030s.
• Strategic reallocation towards non-U.S. equities, specifically overweighting emerging markets in Africa and Asia, may be prudent, given their more favorable projected demographic trends and M/O ratios.
• Portfolio adjustments based on these demographic insights should be viewed as long-term strategic shifts rather than short-term tactical plays, acknowledging the M/O ratio's nature as a multi-decade indicator.