SEC Derails Equity markets

Equity markets were enjoying a relatively pleasant week before news regarding an SEC complaint against Goldman Sachs brought about massive selling pressure.  By week’s end, the S&P 500 index was down 0.2% while the Dow Jones Industrial Average rose by 0.2%.

 

Economic data proved to be mixed throughout the week as inflationary pressure remained nonexistent but consumer sentiment unexpectedly fell.  The consumer price index increased a tepid 0.1% in March with the core index, which excludes volatile food and energy prices, remaining flat in the month. 

 

Source: Federal Reserve Bank of Cleveland

Small businesses continue to struggle despite improvement being felt in the economy.  The National Federation of Independent Businesses (NFIB) reported that the March Small Business Optimism Index fell 1.2 points after 9 of 10 sub-indices registered declines.  On the positive side, small businesses indicated that job terminations are finally over, but impending hiring is expected to be minimal.  With weakness lingering, 29% of small businesses are cutting average prices and only 5% view inflation as an imminent threat. 

 

Source: Barclays Capital

 

More encouragingly, retailers reported strong gains in March on the heels of growing momentum in consumer spending.  Retail sales were up 1.6% for the month and are now up 7.6% in the past year.  Gains were fairly widespread and suggest that consumers are gaining confidence as the economic recovery progresses. 

 

Source: New York Times

Demographics my dear watson

It hardly takes Sherlock Holmes to conclude that the world population is rapidly aging.  The implications are vast and largely unknown but likely to play an integral role in every investor’s portfolio in the coming decades.  A number of recent reports are attempting to address this topic and the general conclusion is that depending on where you call home, the impact will be starkly different.

 

One recent report that went largely ignored in the financial press came from the US Joint Forces Command (USJFCOM), an arm of the Department of Defense.  Entitled “The Joint Operating Environment 2010,” the report addresses a number of the trends that are emerging.  Chief among the concerns outlined was the growing divergence in populations within developed and developing nations. 

 

In the US specifically, the median age is expected to rise from 36 in 2008 to 45 by 2040 based on Census Bureau estimates.  The population pyramid below provided by USJFCOM evidences the fattening of the top 1/3 of the graph, effectively the retired cohort.

 

Source: US Joint Forces Command

The USJFCOM and Census Bureau are hardly alone in arriving at these conclusions.  Global consultant McKinsey & Co. recently found that roughly 2/3 of investable assets will be controlled by retirees come 2020.  That group is gradually moving from wealth accumulation to capital preservation.

Source: McKinsey and Co.

The obvious blueprint for the US resides squarely in the prefectures of Japan.  In the 1980s, the percentage of the Japanese population 65 years and older began to skyrocket, rising from 10.3% in 1985 to 22.1% a mere 23 years later.  Initially, the Nikkei benefitted from growth in the “wage earning” demographic, but just as that group crested, so did the Nikkei. 

There is one key differentiator between Japan and the US – immigration.  Immigration laws in Japan are more prohibitive than those in the rest of the developed world.  Between 2000 and 2005, the net migration rate per 1,000 persons was 0.2 in Japan, relative to 3.3 in the US.  Looking ahead, the Census Bureau expects immirgration will add anywhere from 166k to 2.8mln people annually until 2050, with a median of 980k per year.  This frustratingly large disparity highlights the difficulty in trying to predict statistics of this nature. 

Within the European Union, the problem could be even greater.  Europa, the offical website of the EU, reported that in 2003 the fertility rate of the Eurozone member nations was 1.48, well below the 2.1 necessary to sustain current population levels.  The percent of the population over 65 will rise from 15.7% in 2000 to nearly 30% by 2050.  

One trend already playing out in Europe is that of a “gerontcracy.”  The Economist points out that as older populations dominate the electoral base and extend their working careers further into old age, there is a fear that fewer jobs will be left available for the younger generation. 

Barclay’s annual survey of UK Gilts offers perspective on the role demographics plays in the markets.  In the US, 35-54 year olds represented 24% of the population by 1989, eventually peaking at 30% in 2002.  Using a population model, Barclays found that as baby boomers began entering retirement, it was natural they would allocate a greater percentage of their assets to bonds, serving to constrain interest rates.  Now, a greater number of retirees are in the spending phase, which could place upward pressure on US rates.     

Source: Barclay’s Capital

According to a recent report by Neil Howe and Richard Jackson there are several key implications due to an aging population.  As populations age, decreased mobility and adaptability will restrain economic growth and entrepreneurship, leading to higher public deficits as governments shoulder a greater percentage of health and retirement costs.  

Source: Bank for International Settlements

Oddly enough, the US may be in the most enviable position of all the developed economies.  Higher immigration and fertility rates mean the US will play a greater role in the political and economic direction of the developed world. 

Source: The Greying of the Great Powers

Developing nations will also emerge as potential beneficiaries of the upcoming demographic shift.  In Africa, less than 4% of the population will be older than 65 by 2025.  In Asia and Latin America that figure will stand at 10%.  An overly young population has the potential to bring unrest in some of those nations as many young workers will be unable to find jobs. 

The world is entering a period of rapid aging unlike any we have previously seen.  Certain countries such as Japan and those in Western Europe are facing an increasingly difficult outlook.  A passing of the torch from developed to developing nations seems almost inevitable at this point, but an ability of nations like the US to capitalize on this trend will potentially serve to stem the rising cost of old age. 

 

The week ahead

Earnings reports will dominate the headlines during a week with relatively few economic releases of note.

 

Earnings season continues to gather steam.  A few of the important companies to report includes Citigroup, IBM, Eli Lilly, Apple, Coca-Cola, Goldman Sachs, Yahoo, Boeing, AT&T, Moody’s, Amazon.com, American Express, Credit Suisse, Microsoft, Nokia, Pepsico and Xerox. 

 

Economic releases that matter this week include the leading indicators, producer price index, existing home sales and durable orders. 

 

The European Central Bank will publish its annual report on developments in economic and monetary policy as well various issues impacting the financial markets at large.  Finance ministers from the G20 are gathering in Washington, DC for meetings on Thursday and Friday. 

 

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