Wednesday, May 4, 2011

Demographic Destiny & The Next Secular Bull Market

From Traders Narrative:
Mark Hulbert reported recently on a demographic study from Ned Davis Research which highlighted a little known demographic shift that will happen in the US. We are all well aware of the aging population in the US. But what many are not expecting is that the US will become a very young country by 2020. By then, an increasingly large part of the total population will be under 15 years old.

So the population of the US will be like a barbell – the young and the elderly at each end anchoring the other. The part of the population that will be shrinking is the middle-age section. This is something that I touched on previously through a discussion of the MY ratio (middle to young ratio). This is how demographics effects the stock market directly.

A chart of the ratio of those middle-aged and those young has an unbelievably good track record for predicting the price earnings ratio of the stock market. And since the vast majority of the total return from the stock market comes from price earnings expansion, this provides us with a very good guide for future stock market returns. Of course, this is a long term and macro guide. It is not suitable for navigating the short-term gyrations of the market....MORE
HT: Abnormal Returns