Demographics Series No. 1
In this first of our three-part series, The Winds of Demographic Change, we examine the investment implications of declining fertility rates, aging population and increasing life expectancy in the United States.
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Demographics Series No. 1
In the first of our three-part series, The Winds of Demographic Change, we examine the investment implications of declining fertility rates, aging population and increasing life expectancy in the United States.
The Winds of Demographic Change: The United States
There are a number of demographic trends that will make the U.S. a more diverse, more secular and older nation. None may have a greater investment impact than the aging of America due to demographic change.
Today, the 65 and older cohort is the country’s second smallest age group, only larger than the 18 and under age category, and well behind the number of individuals in the 25-44 and 45-64 age groups. By 2035, the number of Americans age 65 and older will explode, from under 50 million to about 80 million, becoming the third most populous age cohort.1 This will have a profound impact on the economy and financial assets.
A Changing Supply-Demand Dynamic for Assets
At its most fundamental level, the price of any asset is a reflection of nothing more than the balance found between supply and demand. An aging population is expected to shrink the demand for stocks in the years ahead as:
- Older investors shift toward greater allocations of conservative fixed income investments, and
- The aggregate pool of Baby Boomer savings dwindles due to the drawdown to fund retirement spending.
A diminishing demand, without an offsetting shrinkage in supply or the emergence of a new source of demand, will pressure stock markets lower. While Millennials may be a great candidate to replace this loss of demand, they remain, for the foreseeable future, in a phase of adulthood that is more dominated by consumption and debt accumulation rather than by savings.
Fears of an asset “meltdown” due to dispersion, however, may be exaggerated since the drawdown will extend over many years.
Spending Patterns Change, Creating New Investment Opportunities
Spending behaviors change as people age in response to evolving needs and priorities. New spending patterns will adversely impact some businesses, while benefiting others. The beneficiaries of these changes may include:
- Pharmaceutical and Biotechnology Companies—Companies geared to treat the diseases and infirmities of old age will profit from a growing demand for their products.
- Senior Housing—Operators and developers of senior communities and nursing homes are those positioned to benefit from retiree migration.
- Medical Device Makers—Hip replacements, infusion pumps and pacemakers are some examples for which aging should drive demand.
- Personal Medical Technologies—Wearable medical technology, at-home monitors and smartphone integration are just the start of how medicine is becoming personalized.
- Health care Solutions—The pressure on public budgets and insurers will benefit companies with solutions that decrease the cost of health care delivery.
- Leisure—Retirees will look to travel early on, and companies that provide the “experiences” Baby Boomers desire may benefit.
Recognizing these broad changes sweeping the U.S., investment professionals may want to consider supplementing well-diversified portfolios with small, targeted allocations in specific sectors of investment opportunity.
In our next article, we examine the implications of demographic changes outside of the U.S., and how they may impact decisions on allocating international exposures. Click here for the 2nd post in the Demographic Series.
See referenced disclosure (2) at http://blog.americanportfolios.com/disclosures/