From San Fran Fed
This evidence suggests that U.S. equity values are closely related to the age distribution of the population. Since demographic trends are largely predictable, we can forecast the path that the P/E ratio is likely to follow in the next few decades based on the predicted M/O ratio. Figure 2 compares the actual and model-implied P/E ratios for the sample period ending in 2010. We calculate the path for the model-implied P/E during the sample period by feeding in actual M/O ratios.
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Monday ~ August 22nd, 2011 at 8:23 pm
Lord
Pricing is often based on extrapolated growth, so pricing will suffer, but by less than crude demographics would offer as US equities are world markets and will still compete with emerging growth. A factor of two compression in p/e is common but this will largely occur through expansion in earnings rather than drops in price.
Monday ~ August 22nd, 2011 at 10:15 pm
JazzBumpa
I very seriously doubt that you can find any historical example of a 2x compression in P/E due to earnings expansion. P/E is very largely driven by the numerator.
The SF Fed model is a naive abstraction. S&P 500 daily volumes were 1 to 3 *10^6 in the 50′s, averaged 1.1*10^8 in the 80′s. Volumes this year have averaged over 4*10^9. Population demographics are essentially irrelevant.
The average holding period for NYSE traded stocks is measured in seconds, not minutes.
What possible difference can it make if we old fogies (or fund companies through which we indirectly speculate) sell all our equities? Private investor contribution to trade volumes is miniscule, and has been for decades.
Cheers!
JzB
Monday ~ August 22nd, 2011 at 10:52 pm
Lord
In this case, earning growth will be driven by buybacks to the extent they aren’t needed for expansion.
Wednesday ~ August 24th, 2011 at 5:09 pm
Noumenon
I’m 35 so I’d like to see if their model has the stock market coming back in 20-30 years.
Monday ~ August 22nd, 2011 at 10:44 pm
Lord
They consider the population in their peak earning years which would be the marginal buyer, but the number of elderly will rise for nearly two decades and their retirement will also stretch for about that long, with how much held for transfer to future generations, so prices over limited time spans are of limited usefulness. It would be interesting to see a similar chart for the UK which has had a stable population for three decades. Their market has certainly not been stationary over that time.
Tuesday ~ August 23rd, 2011 at 5:20 pm
st
How does this tie in with immigration patterns?
Tuesday ~ August 23rd, 2011 at 12:15 pm
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