Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 580

Are demographics destiny for the stock market?

A recently released paper called The Wealth of Working Nations found that, after controlling for working-age population (i.e. those age 15-64), historical GDP growth is quite similar across most developed countries. But, this got me thinking, “How much do demographics impact the stock market?”

With the Baby Boomers continuing to retire in the U.S. and population growth slowing throughout most of the developed world, will this spell disaster for future stock returns? This isn’t a simple question to answer.

For years, researchers have debated the impact of population trends on economic growth and market performance. Some have argued that demographics are the hidden force behind long-term market trends. However, others believe that other factors such as productivity growth play a far larger role.

In this post, I will explore this relationship in more detail to see whether population really holds the key to economic growth and future stock returns. Let’s dig in.

Does population predict GDP growth?

When it comes to population growth and GDP growth, there is some evidence that they are positively correlated, at least within developing countries. The Federal Reserve released a note in September 2016 which concluded that, “demographic changes account for a significant portion of growth slowdown in several of these [OECD] economies in recent years.”

Looking at GDP growth and population changes over time makes this more apparent. For example, from The Wealth of Working Nations paper, you can see how GDP has changed in a handful of advanced economies since 1991:

What you may notice is that countries like Italy and Japan have had worse GDP growth than countries like the U.S. and Canada. This has occurred for a multitude of reasons, but one of them is related to changes in working-age population.

When we look at the changes in their working populations, there are many parallels:

As you can see, countries with the largest working-age population declines have also seen some of the worst GDP growth since 1991.

Putting it altogether, the authors divided GDP by the change in working-age population and found some remarkable convergence across countries:

After controlling for working-age population, basically every country besides Italy has had remarkably similar changes in their overall GDP. This isn’t GDP per capita because it doesn’t use total population, but working-age population. In other words, GDP per worker has grown roughly the same across these developed economies.

But if this relationship seems to be true for the economy, what about the stock market?

Does population predict stock returns?

When it comes to population changes and the stock market, one of the most comprehensive papers on this topic was released by Rob Arnott and Denis Chaves back in 2012. Their research examined 60 years of data to see how demographic changes impacted stock returns and found a somewhat positive relationship.

For example, after regressing the size of different population cohorts on future stock returns, they found that a roughly 1% increase in those aged 50-54 was associated with a 1% higher annual return for a country’s stock market. You can see this in the figure below:

Now compare this with the 70+ age cohort where every 1% increase in their share of population suggests 1.5% annual decline in future stock returns. In other words, countries with a higher share of workers have improved stock returns. Arnott and Chaves concluded as much in their paper:

“Large populations of retirees (65+) seem to erode the performance of financial markets as well as economic growth. This finding makes perfect sense; retirees are disinvesting in order to buy goods and services that they no longer produce, and they are no longer contributing goods and services into the macroeconomy.”

Arnott and Chaves aren’t the only researchers do to an analysis on demographics and stock returns. The blogger EconomPic had a post on the same topic back in 2017. He also found a positive relationship between population growth and real equity returns across countries from 1900-2013:

So, is this a closed case? If population growth is so important, why do we even bother making predictions about anything else related to stocks?

Because population growth isn’t the whole story. If we go back to Arnott and Chaves’ paper, they actually made some predictions on future stock returns by country based on their demographics. Here’s a map of their annualized stock market forecast by country for 2011-2020:

According to this, the U.S. should have had a 0%-4% annualized stock market return, Japan should’ve had less than a -2% return, and China should have had a greater than 9% return over this period. But what actually happened? None of those things.

From 2011 to the end of 2019 (pre-COVID), the U.S. had the highest return with China and Japan performing roughly similar:

While this is only three countries from the many listed above, it illustrates the difficulty of predicting future stock returns based on demographics alone. Yes, population matters, but other factors such as technological change, productivity growth, and investor preferences can matter even more.

The bottom line

Demographics play a significant role in shaping economies and their underlying stock markets. The research I’ve highlighted shows a clear relationship between population trends, GDP growth, and stock returns. In general, countries with growing working-age populations tend to experience stronger economic growth, which often translates to better stock market performance.

However, demographics are not always destiny in the stock market. Technological advancements, productivity growth, policy decisions, and shifting investor preferences can all significantly impact stock returns, sometimes overshadowing demographic effects. Additionally, a country’s market performance isn’t solely determined by its own demographic profile, but can also be influenced by other global trends and capital flows.

While the retirement of Baby Boomers will present future challenges to stock returns, this doesn’t necessarily spell doom for your portfolio. A changing demographic profile could spark innovations in productivity or reorient the global economy in a way that mitigates these negative demographic pressures.

Yes, work will need to get done for civilization to keep moving forward. But with the continued development of AI, there’s nothing that says that these future workers must all be people.

Either way, what matters for you isn’t the demographics of any one country, but owning a diverse set of income-producing assets. That’s how you counteract a changing population and build wealth for the long run.

 

Nick Maggiulli is the creator of personal finance blog Of Dollars And Data and the Chief Operating Officer at Ritholtz Wealth Management. For disclosure information please see here. If you liked this post, consider signing up for Nick’s newsletter.

 

  •   2 October 2024
  • 1
  •      
  •   

RELATED ARTICLES

Are the good times about to end?

Expensive market valuations may make sense

The enduring wisdom of John Bogle in five quotes

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Investment strategies

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Property

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Investment strategies

Dumb money triumphant

One sign of today's speculative market froth is that retail investors are winning, and winning big. It bears remarkable similarities to 1929 and 1999, and this story may not have a happy ending either.

Retirement

Can the sequence of investment returns ruin retirement?

Retirement outcomes aren’t just about average returns. The sequence of returns, good or bad, can dramatically shape how long super lasts. Understanding sequencing risk is key to managing longevity risk.

Strategy

How AI is changing search and what it means for Google

The use of generative AI in search is on the rise and has profound implications for search engines like Google, as well as for companies that rely on clicks to make sales.

Survey: Getting to know you, and your thoughts on Firstlinks

We’d love to get to know more about our readers, hear your thoughts on Firstlinks and see how we can make it better for you. Please complete this short survey, and have your say.

Investment strategies

A framework for understanding the AI investment boom

Technological leaps - from air travel to computing - has enriched society but squeezed margins. As AI accelerates, investors must separate progress from profitability to avoid repeating past mistakes.

Economy

The mystery behind modern spending choices

Today’s consumers are walking contradictions - craving simplicity in an age of abundance, privacy in a public world. These tensions tell a bigger story about what people truly value and why.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.