Baby boomers own an outsize helping of the market and are constantly reducing it, a process with significant implications for the supply and demand for equities, the interpretation of fund-flow statistics and the kinds of stocks likely to perform better and worse in coming years.
A breakdown of household-stock and stock-fund ownership by generation shows more than half is possessed by baby boomers, those born between World War II and the mid-1960s.
Millennials, now the largest generation, lack the size and financial wherewithal to absorb very much of the ongoing boomer liquidation in real time.
The good news, such as it is, might be that stock ownership is so concentrated at the upper end of the wealth strata that most of these holdings don’t need to be sold by their well-heeled owners to fund day-to-day retirement expenses. The Federal Reserve reports that the richest 10% of households own some 88% of all equities in individual hands.
This means the long-running story of boomers dumping their portfolios en masse on to the market and depressing equity values is mostly a red herring.
Still, a steady bleed of selling will persist for years.
Harley Bassman, a longtime fixed-income executive at Merrill Lynch and elsewhere who now writes the Convexity Maven newsletter, notes that a large and growing flow of selling is mandated by law. IRA assets, for instance, are subject to mandatory withdrawals beginning at age 70 1/2. More than a quarter-million Americans turn 70 each month. There is nearly $11 trillion in these accounts. Bassman calculates that this year $75 billion had to be sold, rising to $250 billion a year in 2030.
Those are not enormous totals in the context of a $30 trillion U.S. equity market, but represent a persistent and strengthening undertow of selling in the market.
Much of this systematic retreat comes by way of target-date retirement funds, a hugely popular asset-allocation vehicle that shifts from equities into bonds or cash gradually until a specified retirement year. There is nearly $3 trillion in these funds, which are often the default option in corporate 401(k) plans. More than 40% of that total is pegged to retirement years 2020, 2025 and 2030.
These funds, along with other mixed-asset approaches, also mechanically sell equities to rebalance to their proper allocations, so in a generally rising stock market such disciplined vehicles will be net sellers.
Again, this is all an overhang of supply of shares on the market but not in itself enough to drive sharp declines. For one thing, individuals control less than half of all U.S. equity value, so the demographic tidal shifts are one among many factors. But it helps explain the slow leakage of cash out of equity funds in recent years, illustrated here since the start of 2018.
These structural drivers of fund flows also mean it’s generally wrong to view equity…