A new study of American demographic patterns and the stock market predicts that while the market may rally periodically, its overall direction will be downward until about 2018.
This bearish forecast is based on a model devised by three finance professors -- John Geanakoplos of Yale, Michael J.P. Magill of the University of Southern California and Martine Quinzii of the University of California at Davis. In a study titled "Demography and the Long-Run Predictability of the Stock Market", they report that their model has done a good job of explaining the bull and bear markets of the last century. But its accuracy as a forecasting tool is untested.
The professors' approach is complex, but it depends on a simple indicator: the ratio of the number of middle-aged people to the number of young adults in the population. When this ratio rises, the overall market's price-to-earnings ratio will rise, too, the professors predict. When the age ratio declines, as it is likely to do until about 2018, the market's pe will also decline.
Demographics are the most important factor in determining long-term market trends, according to the professors, who believe that individual investment behavior largely depends on age-related patterns. Younger adults, those from 20 to 39, are generally consumers. Middle-aged people, 40 to 59, tend to invest in stocks.
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