Retirees have never owned so many equities
And that's a market risk as they don't have luxury to buy and hold through a slump
What a drag it is getting old (on equities) ... to borrow a phrase from Mick Jagger.
As the stock market breaks fresh highs, a sinister downside risk is lurking in the shadows — your grandma. The share of U.S. equities owned by people at or close to retirement age has surged to a record level of 80 per cent. Retirees don't have the luxury to buy and hold through a market downturn. If a downturn does materialize, demographically induced selling is a force that could exacerbate the spiral powerfully, with the effects ricocheting into consumer spending.
Equity markets in the United States are breaking new highs, and there is a buzz of euphoria around the market commentary. We've pointed out that the rally looks a little thin — breadth is weak, and tests such as the Dow Theory fail to confirm the validity of the highs.
Indeed, our Strategizer asset allocation model is flashing a maximum bearish signal on the S&P 500 based on extremely stretched sentiment, crowded positioning and technical readings. Strategizer hasn't been this gloomy since the beginning of 2022, when it called the carnage that defined that year in markets. And that's before you factor in uninspiring earnings and a weakening macro backdrop. So, equities may be at a new high, but there is a lot of air below.
Against that backdrop, it's surprising to see who holds those surging equities. The recent rally is not a story of meme-stock generation speculators bulling up the market. Equities are an old man's game. A full 80 per cent of the market is currently owned by people above the age of 55. That's up from 75 per cent on the eve of the COVID-19 pandemic, 65 per cent just before the great financial crisis and an average of below 60 per cent in the nineties and aughts. The share of the market held by people over 70 years old is up to an astonishing 30 per cent.
By contrast (and more in line with the life-cycle theory of personal finances), the share of fixed income held by people 55 or older is 84 per cent, not too different from the 82 per cent share 10 years ago.
Ownership is, of course, a zerosum phenomenon, and the biggest squeeze in ownership share has been on the long-ignored generation that is now between 40 and 54 years of age, which is down from around 30 per cent in 1990 and 20 per cent 10 years ago to roughly 15 per cent currently.
Here is why this all matters: as people approach and move past retirement age, risk aversion should be falling, and risky assets converted into safe and well-diversified portfolios that yield stable and predictable cash flows. The luxury to “hold on” through a downturn does not exist for a large portion of the elderly. It's difficult to keep fundamental forces such as demographics in mind in the hurly-burly of daily market moves, but they're there, and shouldn't be overlooked.
The unprecedentedly high share of equities owned by older investors poses a meaningful two-way risk.
First, it could exacerbate a market downturn. If equities start to drop, many retirement-aged equity owners will be forced to quickly rebalance their portfolios in favour of fixed income and cash, reinforcing the bearish momentum and weighing further on prices.
Second, the realized losses could spill into reduced consumption and spending as households retrench, in turn tripping up demand and weakening the backdrop for stocks further.
From a sectoral standpoint, the biggest risks are where the retired tend to do most of their spending — think elective medical care and the leisure, travel and hospitality industries.
My, grandma, what a big portfolio you have — all the better to eat you with. Special to Financial Post
Dylan Smith is a senior economist and Atakan Bakiskan is an economist at independent research firm Rosenberg Research & Associates
Inc. founded by David Rosenberg. To receive more of David Rosenberg's insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.
As the stock market breaks fresh highs, a sinister downside risk is lurking in the shadows — your grandma.