Correlation Between Age Demographics and Stock Market Prices?

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While perusing this early retirement reading list for more books to read, I ran across an interesting fellow named Harry S. Dent, Jr. His primary theory is that age demographics are strongly correlated with the economy and thus stock market prices.

In particular, the number of households headed by 46-50 year-olds are the best indicator because they are shown to have the highest spending. This makes sense, as around age 50 is also when peak income occurs while you also have spending pressure from grown-up kids and college tuition. After that, the kids move out, things slow down, and average income drops. Here are some charts from the HS Dent Foundation website:

Source:HS Dent Foundation

By looking at birth rates and adjusting for immigration, you can basically predict how many 46-50 year-olds there will be well into the future. Here’s how the shifted birthrate data corresponds to the Dow Jones stock index adjusted for inflation:

Source:HS Dent Foundation

According to the birthrate data, we are looking at depressed prices for another 10-15 years or so, but things will pick back up after that. While I think there may be something to this concept on a long timescale, I would be careful with trying to profit with it in the short-term.

I’m actually look at Mr. Dent himself here – a quick look around shows that he is trying everything under the sun to make money from this simple theory – writing a new book every few years with mostly the same content (2011, 2009, 2006), selling $1,500 seminars to “Demographics School”, and even starting his own Dent Tactical ETF (ticker symbol: DENT) with poor performance since inception and a bloated 1.65% expense ratio. Potential investors should know that he already started a mutual fund previously that failed:

In 1999, the AIM Dent Demographics Trends Fund was launched, based on the demographic economic and lifestyle trends identified by Dent. Unfortunately, the fund’s results were miserable. From 2000 through 2004, the fund lost more than 11 percent per year and underperformed the S&P 500 Index by almost 9 percent per year. In 2005, its sponsor put investors out of their misery by merging it into the AIM Weingarten Fund.

Over the years, he has made many predictions. Some of them came true, more or less. For example, he predicted that the slowdown in Japan economy would coincide with the end of the end of their peak number of 46-50 year-olds in 1990-1994. Some of them did not, like in 2006 when he predicted the Dow Jones would reach 32,000-40,000 in the year 2010 (the highest ever close was 14,164 in 2007).

The last prediction I could find was Dow 4,000 to 6,800 somewhere around 2012. That’s over a 50% drop from today’s prices. I think I’ll add this demographics theory to my investing consciousness, but I’ll leave the bold predictions behind.

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  1. Money Infant says

    It’s not a promising picture for those of us in our mid forties is it. If Mr. Dent is right then stocks will be a losing proposition for investing during our peak earning years. Hard to say how accurate this is though considering the huge drop in the Dow coinciding with the highest peak in the spending wave.

  2. His book is famous for being probably the biggest joke ever published in terms of outlandish predictions. 40,000 level on the Dow is just unthinkable. The implications that would have become if this had fulfilled is outlandish. 4 years ago people had heart attacks when it corrected with a decline of 50%. This guy was stupid enough to think it could rise 400+%. I could never take Harry S Dent serious after that.

  3. As I recall, Dent is the guy who predicted the Dow would hit 40,000 by 2009, among other predictions in a half-dozen or so books going back to the ’90s.

  4. I stopped reading once you pulled in the Dow 30. This is a worthless index, try it against S&P or something broader.

  5. Brad’s comment regarding the DJIA being a worthless index seems kind of ridiculous. It is still regarded as one of the most popular indexes for judging market returns. Not only that, but the correlation between the S&P 500 and the Dow is .95, so on an average year the return is within one half of one percent. Wow!

    Of course, either the S&P or total market index are a better match of the overall stock market, but such protests seem equal to arguing about the unemployment rate being ten percent instead of 9.5.

    Regarding Dent, I have been hearing his rants and self promotional book propaganda for some time and it certainly appears that he is more concerned with making money off his predictions by picking out patterns and fitting it into a prediction. As usual, most of these prognosticators are lucky if they are somewhat correct nearly 50 percent of the time.

  6. Interesting stuff. I’ve always been skeptical of anyone hawking a theory or system regarding making money on stocks, real estate, etc. I think about it this way: If I had an insight or devised a system that truly succeeded in creating wealth, I wouldn’t be wasting time writing a book about it. I’d be busy executing it and looking for beach property!

  7. I looked at the Early Retirement Reading list that you linked to…As someone seriously in the middle of “going for” early retirement, I am fascinated by these guys that write such books. I wonder how many of them are really NOT making ends meet and need to supplement their income via “writing about the lifestyle”.

    J, what is the single best book out there on early retirement? In fact, is there a book out there that talks about early retirement BESIDES “personal experience” books? Is there a book that has surveyed people in early retirement and that talks honestly about failures as well as successes? (I sense that your recent columns is touching on the subject of guys who write books about their personal ideas and person experiences that time has proven to be …wrong)

  8. @Brad – I agree the Dow isn’t the best index but that’s what was provided and I’m far too lazy to try and extract the birth data and pull in S&P 500. If someone wants to do so, I’ll be happy to share it. Honestly, I think the overall correlation is good enough that the general shape will looks the same.

    @bluecat – I don’t know if what you’re looking for exists?

  9. I think the spending claims have some merit. I’m in my early 50’s and in the past couple of years had my last child move out of the house. My utilities went down, my appliances last longer, my furniture lasts longer, my cars get far fewer miles put on them, my car insurance went from 400/mo to 120/mo.

    I pretty much have a furnished house, yard and garage. Add to that the decreased interest in materialism that my wife and I have experienced in the past few years and I can see where spending would really decline for many people later in life.

    The only area where our spending is the same or higher is in travel.

  10. So at age 60+, your wife changes into a ninja??


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