Key Points
According to JPMorgan’s analysis, aging will have a long-term impact on stock performance. People are living longer and birth rates are falling. For example, the share of the U.S. population aged 65 and older is expected to grow from 18.1% to 21.5% over the next decade, the bank said. China is growing faster, with its elderly population expected to grow from 14.6% to 21.6% over that period, according to the analysis. That’s not good news for the stock market, according to JPMorgan strategist Alexander Wise. “Overall, we find that aging is negatively related to returns, earnings growth, and valuations,” he wrote in an Aug. 30 note. Over a 10-year period, a 1% increase in the share of the elderly population would reduce the average annual market-wide return by 0.92% in the unweighted sample, Wise said. Both slower earnings growth and lower valuations explained this effect. The bank also ran a population-size-weighted sample, based on the hypothesis that demographic changes would be relatively more important in the largest markets, such as the U.S. “The results are generally very similar, suggesting that the impact of aging in a country may be quite uniform across countries, large and small,” Wise said. Slower Earnings Growth An aging population affects earnings growth in a number of ways, including slower labor force growth, which reduces economic growth, Wise said. The analysis found that for every percentage point increase in the share of seniors in the population, growth per worker falls by 0.58 percentage points. Wise noted there is also evidence that it can reduce innovation and productivity growth. Lower Valuations This effect can also be seen in stock valuations. An aging population reduces national savings as seniors take distributions from their retirement savings and sell their stock holdings, raising bond yields, Wise said. Bond yields and prices move in opposite directions to each other. Additionally, people tend to reduce their allocations to stocks as they get older, which should also put pressure on stock prices, Wise said. “An aging population also leads to lower earnings growth expectations, which could justify cheaper valuations,” he added. As the population ages, the health care sector is poised to benefit, Wise said, because the beneficiaries are older people who spend more on health care. “There’s a clear positive correlation between aging and excess returns in the health care sector, and this is entirely due to accelerating revenue growth,” he said. A one percentage point increase in the share of the elderly population over a 10-year period translates into an average annual increase in the health care sector’s returns to the overall market of 0.85 percentage points, Wise noted.
