Do demographic changes matter for financial market returns?

Be careful when predictable factors appear to shape financial market returns, but nonetheless this result, written up by Robert Arnott and Denis Chaves,is intriguing:

It seems natural that the shifting composition of a nation’s population ought to influence GDP growth and perhaps also capital markets returns. Entrepreneurialism, innovation, and invention tend to be associated with young adults. Accordingly, GDP growth should perhaps be best when there is a preponderance of young adults in a population. Investing for retirement is associated with middle-age, with a shift in preferences toward bonds with late-middle-age. So, stock and bond returns might be best in populations with growing rosters of these age groups, respectively. Our data – spanning over 60 years and 22 countries in our main tests and roughly 175 countries in out-of-sample robustness checks – support all of our priors.

We confirm what others have already demonstrated, but we extract markedly more statistical significance by adapting a polynomial curve-fitting technique pioneered by Fair and Dominguez (1991), to this new purpose. In our work, we find that a growing roster of young adults (age 15-49) is very good for GDP growth, a growing roster of older workers is a little bad for GDP growth, and a growing roster of young children or senior citizens is very bad for GDP growth.

This is in accord with some of Brink Lindsey’s recent observations.  For the pointer I thank Sami, a loyal MR reader.