Revised October 1999 All rights reserved

This year the Dow Jones Industrial Average crossed the 11,000 mark for the first time in history, stumping analysts on why this bull market that started in August of 1982 just doesn’t quit. The experts study price earnings ratios, inflation forecasts, gross domestic product growth, the 30, 60, 90, 180 day moving averages plus a thousand other charts, graphs and tables. They try to guess the next move of the Fed, the Bank of Canada, Congress, the White House and Paul Martin. Even when armed with all this information, the market momentum continues to surprise even the most optimistic analyst.

For years I’ve been studying demographics, particularly the effect baby boomers have on Real Estate. Recently, I began to research the effect Boomers are having on the stock market and by doing so I've come to realize that the stock market is in for serious trouble. Beginning sometime after the year 2001 stock prices will spiral downward for about 2 decades, destroying the dreams of a comfortable retirement for millions of people.

Before looking forward, let’s look back. To understand why we are heading toward the longest bear market in history it’s important to examine the reasons why stock markets have increased over 1300% in 17 years.

Think about it… From the beginning of time until about 1950 people counted on having lots of children to look after them in their old age. Pensions didn’t exist; the family unit looked after its elderly. The stock market was a speculative novelty – gambling - not something you trusted your future to.

However, around 1950 people’s expectations began to change about how they would survive during their retirement. The responsibility shifted from the immediate family to the pension plans that were just being introduced by the governments and big business in North America.

Why were pension plans introduced? Well of course Governments and big business cared so much for the long term happiness, security and well being of their citizens/employees that they felt an overwhelming social responsibility to provide them with a well funded, long golden retirement.

And if you believe that one…

Let’s cut to the bone. Governments wanted to get re-elected. Period. Business was interested in the bottom line. To increase profits in the pre-robot and pre-micro computer world of the 50’s and 60’s, they needed to attract and retain a very scarce commodity during those years, employees. Pensions were good for the company’s bottom line in the 50’s and 60’s because it helped keep employees and attracted new ones.

The reward for long term employment with one large employer would pay off in a pension that would provide a comfortable retirement. The image of the loyal "company man" was born, symbolizing the fellow who would start in the mail room and work his way up the company to middle management over a period of 30-40 years to retire at 65 with a gold watch and a nice monthly pension cheque for life. For those without a company pension, a more modest government pension could be counted upon.

But you weren't expected to collect! The statistics on life expectancy in 1950 indicated that the odds were stacked heavily against you ever living to retirement age and therefore the companies that set up pension plans anticipated that few people would actually collect for long... if at all!

However, between 1950 and the early eighties things changed dramatically! Rapid advances in the health sciences meant people started living much longer. The pension plans that were originally set up, on the assumption that the average worker would only collect for a few years at the most, were paying more and more people for 10-30 years after retirement. Pension plans were becoming very expensive.

Since the option of relying on family to provide for retirement was no longer socially acceptable, people desperately wanted to believe in government and big business for an endless flow of retirement cash. However, in the early eighties, cracks in that belief started forming for more and more of the population.

1981 saw interest rates soar to over 20% and many businesses went bankrupt. The companies that did survive got a big wake up call that the world was changing and the era of corporate downsizing began. Corporations got mean and lean implementing massive layoffs and restructuring. The main role of middle management, relaying information up and down the corporate structure, was being taken over by computers allowing corporations to remove many layers of managers from their organizations. And corporations realized a $30,000 severance package was nothing compared to the huge future pension liability they were incurring by keeping employees on the payroll for life. Suddenly corporations were "contracting out" and "computerizing", neither requiring a long term pension commitment.

At the same time, the public was becoming more and more alarmed at the huge deficits the government was running up in order to maintain our standard of living. Stories began to appear about the Canada Pension plan going broke long before the bulk of the baby boomers would ever get their first check. Around 1990 governments finally began to get serious about re-structuring following the same path of computerization, contracting out and reducing personnel levels as their corporate peers had started 10 years earlier. Thousands of comfortable government jobs that people assumed they would have for their working life were gone with the stroke of the Finance Minister's pen.

It didn’t take a Harvard degree to figure out the system was in trouble. The days of big business and big government providing jobs and looking after you in your retirement were over. With vanishing job security, the rapid decay in the confidence of government pension plans and the new social taboo of expecting your children to support you in your old age, people began to realize they were largely on their own to provide for their retirement. Not only that, for the first time in history, retirement meant 20 to over 30 years of self sufficiency instead of only a few years in the care of adult children as had been the case prior to 1950!

It began to dawn on millions of people in the early eighties that they were on their own to fund 20-30 years of retirement. Canada Savings Bonds and GICs weren't going to do the trick. They needed a miracle!

Enter the Stock Market Mutual Funds with the promise of returns that would save the day. They caught on like wild fire and money started flowing into the mutuals and from there to the stock market.

Momentum grew rapidly from 1982 and the stock market charged ahead as people began to shift their savings and future retirement hopes into stocks. Even after the stock market crashed 25% during two days in October, 1987 as a result of unrestrained computer program sell orders, people were pumping money back into the market a few weeks later. Compare that with the stock market crash of 1929 that scared the public away for about 20 years!

Today, analysts are stumped because they are looking back to how other bull markets behaved but what we have is a whole new game! The reason people invest has totally changed! They’re not buying a lottery ticket any more, gambling a few bucks and hoping they picked a winner. They are desperately counting on the stock market for their future retirement survival!

Now let’s apply the principles of Demographics to the stock market.

Demographics, the study of population trends, is basically pretty simple and hard to argue with. It's based on just two concepts: we all get one year older each year and basically we act our age. That means that 20 year olds act like 20 year olds no matter if it’s 1950, 1980 or 2010 and so do 40, 50 and 60 year olds.

Let’s first identify 4 basic Investment Stages and study each group’s ability to…

1. push stock prices up by buying, therefore increasing demand for available stocks,

2. drive prices down by selling stocks and thus increasing the supply or

3. not have any influence on stock prices because of the fear to participate or the lack of financial ability.

Too Young:

Before age 40 most people lack the means and motivation to be serious investors in the stock market. They are not yet in their prime earning years and the money they do have goes toward buying cars, having babies, buying furniture, houses... basically setting up their households. Sure they get the pep talk from their dad about saving for retirement, but it's such a long way off that most people lack the motivation to take money away from pressing immediate needs. It's not till you hit 40 that you realize that your working years are about half over and retirement is something you'd better deal with. The 0-40 group can not affect the stock market in any significant manner. They don't own large portfolios of stocks therefore they don't have the ability to push prices down by dumping large amounts of stocks on the market and they lack the financial resources to be able to buy large blocks of stocks to push prices up.

Between 40 and 55 people worry about Wealth Accumulation. They fear that they will not have a large enough retirement nest egg and this motivates them to seek stocks, accepting a higher risk over a guaranteed rate of return. "Even if there was a market correction or even a crash" they are told, "there would be adequate time left before retirement for your investments to regain their value and continue to grow". The mentality during this stage of life is "I can't afford not to take the chance". They have excess money to invest because it is after 40 that debt levels start to drop just as people enter their top earning years.

This group can only affect the market in a positive manner as they are eagerly buying units of equity based mutual funds in small annual investments of about $5000 on average. However they have not yet built up large portfolios; so their ability to drive prices down by selling is limited and they do not yet have the mindset to sell.

Wealth Preservation:

But after 55 with the realization that there are less than 10 years left until retirement, people start to be increasingly concerned with Wealth Preservation. These people have accumulated sizable sums of investments and the thought that the value may drop 25 or 40% just before they require their retirement funds starts to give them sleepless nights. Increasingly, these people start to believe they can't afford the risk of a comfortable retirement vanishing like a mirage just as they proceed through their last few working years. A large drop in the value of their portfolio would be devastating and taking a serious hit at this stage of life is not something this group could likely recover from, motivating people to move out of the stock market and into safer bonds or GICs. Re-balancing your portfolio toward security is a move most mutual fund companies and financial planners recommend in this stage of life.

The group has only a limited ability to push prices up as they, on average, have only five to ten thousand dollars to invest each year. On the other hand they now have a huge potential to drive prices down if they decide to "get out" and dump their multi-hundred thousand dollar portfolios that they have built up.

Over 65 and retired, people then enter the Redemption stage of their life when they begin cashing in their retirement savings to provide a monthly income. At this point in life it is absolutely essential that they do not suffer a big hit to their principle because that is what is being relied upon for survival. This is especially true for the ones who don’t have adequate pension income. A 25-40% drop in value of your investment portfolio over the age of 65 would be devastating and therefore virtually all mutual fund companies recommend that only 0-20 % of their investments during the golden years be placed in equities.

With the earning years behind them, this group no longer has the ability to push stock prices higher because they no longer have the income stream available for investing plus the tax incentives ended at age 69. However, like the Wealth Preservation group, they have a massive ability to drive prices down! They have built up large stock portfolios that can be dumped on the market with just one phone call to their broker following a sleepless night.

Next, let’s study three other special groups identified by the year that they were born. Notice the difference here...everybody moves through all of the above age groups but only a few of us were born in a certain era. These three groups behave differently than the general investor when they are in certain investment stages of their life.

Non Participants:

The first group are people born prior to 1930. They were children when the '29 stock market crash kicked off The Great Depression. They remember their parents speaking in not so glowing terms of the stock market speculation that ushered in very difficult times. They heard the stories of people losing everything and they became young adults when the high unemployment and the effects of the depression where still lingering. The impact on those people was strong: investing in the stock market is gambling! Because of those painful memories this group avoided the stock market as if it were the plague. As a group, they are the non-participants and today are over 68 years old.

Blessed Ones:

The next group consists of the Blessed Ones born between 1930 and 1946. So named by demographic experts, they had but only vague memories of the depression and were too young to be called on to go to war. They entered the job market in the 50's and 60's when wages rose about 40% per decade and unemployment never rose above 7%! David Foot, one of Canada's well known demographers said in an article in the Vancouver Sun, Boy, was it ever smart for them to have on average four children each. They created their own market for themselves. When their kids started to move out of the house into apartments in the 1970's, they controlled the rental market. When they started to enter the labor force, they controlled the businesses. And when their kids started to buy homes, they made fortunes in real estate just by sitting back and watching the value of their homes increase five to ten times the price of what they originally paid for them. And now they're making millions off of mutual funds and investments as the Baby Boom generation puts its savings into the stock market.

Today this is the group aged 51 to 67 and possibly the most fortunate that will ever walk the planet. They bought their first houses at the cheapest prices with low, locked in interest rates for the life of the mortgage. As a group they did extremely well during their working years (remember ... 40% wage increase and 7% unemployment) and many are already collecting the most generous private and company pensions no longer offered to younger employees. They have invested over the last 17 years as the Dow Jones Industrial Average has gone from 800 to over 11,000, and as a group they have substantial stock portfolios. However, because of the security they feel, they have a much higher comfort level in holding onto their stock portfolios through their "Wealth Preservation" stage than younger people. Because they are not relying upon their stock instruments as heavily for their retirement as the baby boomers will, they do not feel as compelled to protect their retirement nest egg and will tend to stay in stocks longer.

This factor is what separates them from the younger group, the early boomers, who do not have the same pension security and are not nearly as well off financially in any case.

However, once the Blessed Ones cross the 65 retirement mark and the income flow of their careers cease, they will still follow the trend of the Redemption time of life and move away from the stock market. No matter what the income flow is from a pension, the thought of absorbing a big financial loss after 65 when there is no chance to recover by way of earnings will still push this group to move out of the stock market and into bonds or GIC's.

This group is the last six years of the baby boom generation born between 1960 and 1966 and they have two major obstacles in life: 1. Their huge numbers; and 2. the fact that they are following the early baby boomers through life. They have to compete against each other and the older boomers for everything... jobs, cars, houses, you name it and they were the first group to discover that a university degree didn't mean that a good job would be available. They were just entering the workforce as corporate restructuring was becoming popular (see 1982 graph) and being last ones hired, meant being first to be laid off. Things have not been easy financially for this group and they will continue, as a group, to have a tough time simply because of when they were born. Because they are having a tougher time obtaining the basics such as housing and transportation, they will be putting off investing for retirement. As a group, they do not effect the stock market.

By identifying and studying the four Investment stages of life and three special groups with quite different attitudes and abilities to invest in the stock market, I came to the following conclusion:

Let me explain...

First, let’s examine the graph labeled Canada’s Population 1982. There were a number of factors at work that kicked off this longest running bull market in history. (The graphs are at the bottom of this web page.  Or Click Here to open a new window with the graphs.  You can then flip back and forth as you read or print them out)

In 1982 the baby boom generation was about to start crossing the 40 year old mark. On the graph, note the beginning of the huge upswing of the number of people crossing into their 40's and therefore into their Wealth Accumulation stage of life. This is the stage of life where income is rising and debt levels start to drop freeing up cash to invest in retirement plans. The 40th birthday also brings with it the realization that retirement isn't all that far off. So from 1982 on there was a dramatic increase each year in the number of people over 40, one of the major factors fueling the bull market in stocks.

Up to 1982 the Blessed Ones had money to invest but didn't because they were feeling comfortable with their future pension plans and assumed they had good job security. But that was the end of the era of jobs for life. This group was in the 40-53 year old age bracket in 1982 and when downsizing started to take shape these people were in the middle management jobs that were being eliminated. Often the severance packages paid out to these people were being invested directly into stock portfolios. Even those who didn't get laid off suddenly realized that they could be on their own for retirement and in 1982 started funneling cash into mutual funds.

In 1982 the baby boomers, just beginning to cross the 40 year old mark, and the Blessed Ones 40 - 53, started investing heavily in mutual funds and have been driving this market up ever since. Compare the size of the green shaded areas in the graphs 1982 and 1997 and notice the incredible growth of people in the Wealth Accumulation (buyers of stocks) stage of life between those years. Notice also the total absence of sellers, those groups in the Preservation and Redemption stages of life. The first of the sellers did not appear until 1996 when the Blessed Ones cross the 65 year old mark but that factor continues to be offset with rapidly increasing numbers of early boomers still crossing the 40 year old point of life into the Accumulation stage.

Starting around the year 2001, you have a situation where the number of Blessed Ones over the age of 65 and entering the Redemption stage of life begins to accelerate rapidly (indicated by red on the chart). Remember, these were the people who are feeling secure until they retire at 65. However, at that point they enter the Redemption stage of life and shift out of the stock market. These are big portfolios and when these people phone their mutual fund company and tell them to move out of stocks, they are likely selling a few hundred thousand dollars of stocks as they leave the market.

Compounding the negative effect of the retiring Blessed Ones, around the year 2001 the wall of early boomers (indicated in orange) are just entering the Wealth Preservation stage of life! Because they don't have the golden pensions of the Blessed Ones they have less fortitude to stay with stocks to risk a plunge in stock prices as they close in on the last few years of employment. They will join the Blessed Ones and will begin moving out of stocks around the same time period 2001-2002.

Early Boomers as well have accumulated large amounts of stock market mutual funds and like the Blessed Ones, when they say "Sell" hundreds of thousands of dollars of stocks are sold per investor! Although they may not have as large of portfolios as the Blessed Ones, they have far more numbers making their effect on the stock market even more profound.

The above scenario is the recipe for the start of what will be the longest Bear Market in history and with those factors in place there is no stopping a long downturn in stock prices.

It could start with a sizeable "correction" serious enough to spook those in the Preservation and Redemption stages of life. A few years earlier they may have held their stock positions through a correction or even seen it as a buying opportunity. But now as they age into the more cautious time of life the urge to sell and move into safer investments will be strong. Wave after increasing wave of mutual fund holders will wash into the Preservation and Redemption stages of life, selling their stock mutual funds as they try to protect their retirement finances.

Unfortunately there will be no stopping the slip in prices that will destroy millions of peoples' dreams of a comfortable retirement and an adequate income in their golden years.

But people don't easily give up on their dreams. Desperate younger investors still in their Wealth Accumulation stage of life, not realizing what is happening, will jump in to snatch up "bargains" and create many short lived upturns known as bear market rallies. They will remember the stock market "corrections" of the 1990s that always saw prices break out to new levels over and over, and they will hope that will happen for them as well.

But for each rally brought on by the younger boomers in the Wealth Accumulation stages there will be a larger wave of sellers who have aged into the Preservation and Redemption stages and will see the market rally as a selling opportunity. And so the spiral will continue with each rally being met with waves of sellers dumping large stock portfolios on the market.

The ultimate economic law always stands ... Supply and demand. It's really the only economic Law, among many economic theories. The law states that if demand of anything increases while supply remains constant or declines then prices rise. If supply increases while demand remains constant or declines then prices fall.

Is this just another theory that might happen? I finished researching and writing this paper in the spring of 1998. Since then I’ve shown it to many people in investment circles and haven’t had a reasonable counter theory as to why what I’ve described will not unfold. If you have a theory, I would certainly appreciate hearing it. From my viewpoint I see this phenomenon as unstoppable.

Consider just two simple factors...

It’s important to be aware of changing mega-trends so that you can plot your course.

If you are in a boat on the ocean and the tide changes from incoming to outgoing there is a point where it would seem that nothing is happening. The water is still and it seems that all is calm and no forces are at work. How deceiving that is! Incredibly powerful forces ARE at work such as the gravitational pull of the moon and the spin of the earth. By understanding those forces you can predict and survive the outcome rather than be caught in the resulting tide

Although I’ve identified the coming crisis I don’t have many solutions, only a few ideas.

The Chinese symbol for "crisis" is actually made of two symbols… "danger + opportunity". There are always opportunities in every market and with diligence and some hard work you will be able to identify them. Recently many people have done very well throwing a dart at the mutual fund page of the newspaper. They buy whatever it lands on and then put their head in the sand and forget about their investment under the assumption that, "it always goes up". Those days are over.

Harold Schroth

RE/MAX-Vernon

250-549-4161

1-800-667-2040