In the best of times, it’s difficult to divine the direction of the stock market. Arguing that baby boomers will depress stock prices for several years seems to be a huge stretch. Yet, that is exactly what a research paper released yesterday by the Federal Reserve of San Francisco tries to do.
According to the paper, worried boomers are going to unload “acquired assets, especially risky equities” to finance their retirement in the coming years. This “massive sell-off” might depress stock values. The paper presents a depressing scenario.
“Real stock prices (will) follow a downward trend until 2021, cumulatively declining about 13% relative to 2010,” the paper says. “The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027.”
There are a few problems with this theory. For one thing, forecasting the stock market decades into the future is risky because there are far too many variables that need to be considered. No one knows, for instance, whether foreign sovereign wealth funds will buy more U.S. equities over time. Stock prices also might be bolstered by growth overseas in emerging markets, which has benefited U.S. companies as domestic growth has lagged. Then there are more practical reasons.
Unfortunately, the state of many boomers’ retirement savings is poor. Many seniors expected to be able to fund their retirements with the equity in their homes — something difficult to do after the real estate market cratered. This means these investors might be forced to allocate more of their assets in the stock market than they would like to generate the returns they need to retire because less-risky investments won’t do the job.
Moreover, more people are working later because they either can’t afford to retire or don’t want to. In either case, they will delay tapping into retirement funds for as long as possible because they will grow tax-free. They also might expect their investments to rebound from the market’s recent volatility and might not want to use them if they don’t need the money for their immediate needs.
Boomers need to be very picky about the stocks they purchase. For one thing, they probably should not be chasing growth by investing in risky stocks such as Dendreon (NASDAQ:DNDN), whose shares tanked since the biotech firm withdrew its 2011 revenue estimate. A better bet for these investors might be less-risky dividend payers such as AT&T (NYSE:T), the telecom giant whose yield is 5.98%; cigarette maker Altria Group (NYSE:MO), which offers a yield of 5.82%; and consumer products firm Kimberly-Clark (NYSE:KMB), which has a yield of 4.18%. Contributor Jim Woods has several good dividend ETF picks, including iShares S&P U.S. Preferred Stock Index (NYSE:PFF), PowerShares Preferred (NYSE:PGX) and SPDR Wells Fargo Preferred Stock (NYSE:PSK).
The Woodstock Generation might have changed the world when they were young. An uncertain economic future is changing them in their golden years.
Jonathan Berr does not own any of the listed securities.
