Weaker Dow?

by | Jan 1, 2005 | Archives

At our recent Inspired Investing course we uncovered a factor that shows why the Dow may fall even more.

The factor which suggests further weakness in U.S. stocks has to do with demographics and market psychology.

The demographic group that could negatively affect the Dow are baby boomers, people just like me in their mid fifties. This is one of the largest, richest groups of humanity ever.

Recently talking with many friends and clients who are part of this generation I noticed a repeated theme.

Many were saying “I plan to retire early because of my stock profits. Of course the market has to come back a little and I plan to make 20% or 30% for another year or two.”

At the course we talked about this theme and looked at why the stock market recovery is not likely to happen in the next several years. We looked at the long term (100 year plus) trend of Wall Street and saw that U.S. stocks are in a consolidation period similar to one that has appeared (after a market bubble) every 25 to 30 years. If history is any guide, the market will take years to recover and this consolidation will depress share prices for ten to fifteen years.

We also reviewed how the shorter term in the U.S. (and global) economic cycles are now on the down side of their paths. This is a time in the cycle when share prices are normally depressed. This is a normal process and nothing to fear, yet does suggest that few investors (only those who are very good or very lucky) will see their portfolios rise dramatically in the short and even mid term.

This is where market psychology comes in. The stock market bubble burst in 1999, yet many investors (especially those who had been investing in shares for their first time) have not become aware of the power of the downside. They are in a state of denial still thinking the market will recover soon and salvage their early retirement.

Because of their age this is an issue they will have to face soon. When they do, many of them will realize that Wall Street is not always a one way ticket to wealth. Many may choose to depart the market.

Baby boomers who figure out that that a recovering equity portfolio probably will not salvage their early retirement may also conclude that the market still contains risk as well. Their later retirement could be jeopardized! They have even more to lose by holding too many shares. The market could still be depressed even when they reach regular retirement age!

This realization could cause many mid-age baby boomers to liquidate shares.

If this trend is substantial, it will become a self-fulfilling prophesy. This group is one of the biggest holders of equities in the world. Their sudden realizations about Wall Street's risk could dampen the market a lot.

I doubt that aging boomers and their greater understandings of the risks Wall Street hold will cause a market crash, but markets are rarely moved by just one trend. Millions, even billions of threads make the market whole. Yet many little factors like this attitude of the boomers can have an effect. We need to look at them all to understand the weave. If you are heavily in the market, take care!

Until next message, good global business and investing!