Demographics, GDP, and Future Stock Returns: The Implications of Some Basic Principles

The aging of the baby boom generation has focused investor attention on the issue of how changing demographics will affect the economy generally and the stock market specifically. One commonly expressed view is that stock returns will be depressed as baby boomers liquidate their portfolios to fund retirement. In this short paper, I return to basic theories of economic growth and asset pricing to disentangle the various ways in which demographics can affect future economic growth and future stock returns. I conclude that while the aging of the baby boom generation is indeed bad news for future economic growth, particularly on a per capita basis, it is unlikely to be lead to lower future stock returns