Demographics and Stock Markets

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Demographics and Stock Markets

The hot topic right now is demographics.
Will the baby boom power the stock market to the moon?
This demographic indicator from Volume 29 – US Demographics and Employment worked well in Japan. It also worked between 1900 and 1950 in the US (when the number of 45 year olds grew as a straight line). Volume 29 also includes the US version of this indicator from 1900 to 2050 using official US Census Bureau projections.
Is the Saver/Spender Ratio the Holy Grail? No.
Does it refute the argument that baby boom savings will power the stock market until 2007? Absolutely!

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1989 saw the first significant deceleration in the five-year growth rate of this ratio. It can be seen as an angle in the relatively smooth curve, and it corresponded with the peak in the Japanese stock market.

V29k9706.PDF (99kb) Includes Explanatory Notes for the chart
Chart k from Volume 29: US Demographics & Employment of the June 1997 Encyclopedia shows the Japanese "Saver/Spender Ratio" overlaid on the inflation adjusted Nikkei 225 (1960-97) This ratio fits the Nikkei average quite closely.
The "Saver/Spender Ratio" (a variation on the "Yuppie/Nerd" ratio) divides the 40-49 year old population by the 25-34 year old population. 25-34 year olds tend to be spenders (buying houses, raising children, etc.), while 40-49 year olds tend to be savers that tend to invest aggresively in stocks. By dividing them, this ratio attempts to represent the buying pressure on stocks due to demographics.
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Why does the Saver/Spender Ratio work?
Others have argued that Spenders fuel economic growth with their purchases. While it is true that they spend a lot, they typically borrow at least as much. Their demands on the credit market decrease the money available for all financial assets, including stocks. Savers are actually bigger spenders than spenders. While the BLS Consumer Expenditure Survey doesn't use the Saver age group, it's clear from the two overlapping age groups that it does use that Savers actually spend about one third more than Spenders. Because the incomes of Savers are so much higher, they are actually the group that has the largest per capita savings, despite being the biggest spenders. Savers appear to have the highest per capita income after taxes of any ten year age group (estimated from CES results). Why aren't 50-59 year olds bigger savers? Probably because many have already retired (55-64 year olds have lower per capita income than even 35-44 year olds). Finally, we would argue that Savers (40-49 year olds) put their savings in stocks (often via mutual funds). Because 45-54 year olds already have much of their savings in stocks, they are more likely to put incremental savings in bonds (why the Yuppie/Nerd Ratio works). This may also be due to the fact that per capita income typically peaks in that age group. Psychologically, it is easier to take a risk with "found money" (i.e., a raise) than with money you're used to receiving.
Note: In retrospect, Savers should probably have been called Borrowers.
Those that argue that the baby boom will fuel U.S. stocks until 2007 should examine this chart and V29l (U.S. Saver/Spender Ratio overlaid on the inflation adjusted S&P 500, 1900-2050) closely.
You may be in for a surprise! Hint: the five-year growth rate of the U.S. ratio peaked in 1996...
The explanation pages of Volume 29 examine the 1929 peak, the 1948 low, 1966 peak, 1982 low in the Constant Dollar DJIA and the future. There is a table listing the values of both the U.S. Saver/Spender Ratio and its five-year growth rate from 1995 through 2006, allowing the reader to make his own, informed decision.
Yuppie/Nerd Ratio
The late Stan Salvigsen of Comstock Partners, Inc. developed what he called a "Yuppie/Nerd Ratio". It compared the number of 25 to 34 year olds ("Yuppies") to the number of 45 to 54 year olds ("Nerds"). He developed it for bond market analysis. Charles Minter of Comstock Partners, Inc. continues to track this ratio and employ it in his analysis.
Yuppies (25-34 year olds) tend to be spenders (buying houses, raising children, etc.), while Nerds (45-54 year olds) tend to be savers. Nerds tend to be buyers of bonds, while Yuppies tend to be net borrowers. This ratio is intended to show the public’s side of the supply/demand equation for bonds.
Comstock Partners, Inc.
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Lawrenceville, NJ 08648
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Last modified: April 06, 2005