Inflation Adjusted DJIA vs. Demographic of 45-54 Year Olds |

Inflation Adjusted DJIA vs. Demographic of 45-54 Year Olds

We often discuss the BIG THEMES, such as wealth transfer from baby boomers to younger generations, wealth transfer from west to east, etc. Then, on the other side, we delve into valuations, expected returns, and what factors the markets have already priced in. One indicator that we have discussed in the past deserves an update.

Harry Dent discussed looking at spending patterns of different age groups, then mapping those to the equity markets, which would make sense since company earnings, being driven by consumer spending, should be impacted. Then, a couple of years ago Daniel Arnold came out with a book that had a sensationalist title (The Great Bust Ahead), and built on Dent’s ideas. So I decided to revisit some of their work.

To start, let’s look at spending patterns by different age groups:

(Source: HS Dent Foundation)

Then, Dent goes on to map the highest spending group (46-50 year olds vs. the inflation adjusted Dow):

(Source: HS Dent Foundation)

As you can see, we were off-course in 2009, as the Dow “should have been” at 11K – guess where we are now?

So where do we go from here? Well, Arnold shows us some of the same information, with some estimates going forward:

(source: http://www.thegreatbustahead.com/)

There are a few differences between the series used (such as Arnold using 45-54, not just 46-50) but the idea is the same: we recover into 2010-2012 and then go down on an inflation adjusted basis something on the order of 50%.

If you visit the site above, you’ll also see the statistics for Japan, which imply a sharp rebound (although I think US based investors will lose on the currency, but for those able to hedge out the currency, the Japanese markets have some potential).

There are two ways to achieve the performance above: the markets could go down or inflation could rise significantly (or a combo). We often discuss longer term indicators that are not great for market timers, such as q-ratios, CAPE, and now this one. Yet, they all point to similar fingers of instability that we’ve discussed in the past, and pose serious dangers for the longer term investor.

Last 5 posts by Yaron Sadan

That sinking feeling - May 18th, 2012
Opportunity on the horizon - May 18th, 2012
Early can hurt - May 16th, 2012
Diversify your Diversification - May 15th, 2012
Losing Money Isn't a Crime - May 15th, 2012