The Economist Buttonwood column has a nice story on savings and equity markets from research done by Barclays Capital. We know that savings will have a key impact on equity markets. You need more savings to provide flows to invest in order to get equity markets to go higher. What Barclays found and what is consistent with research on equity risk premia is that relative savings may be the key ingredient for driving equity markets.
In particular, the ratio of young and old investors relative to middle age will determine long cycles in equities. When there is a skew to younger or retiree age groups as a percent of the population there will be less savings. This would be the 25-34 age group and those over 65. As the population of the 34-54 age group increases, there will be an increase in savings and more money invested in the stock market.
The demographics run against the US stock market because the number of retires will be increasing. The young will also be increasing. Hence there will be demographic headwinds against the stock market. Note that this same demographic headwind will have an impact on the global savings glut. Many of the emerging markets have young populations which will be spending money and not savings.
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