24 Dec

Big-Picture Shifts Worth Paying Attention To

WRITTEN BY Rick Rieder

Fed Shifting the Focus to Other Economic Trends

In contrast, there are a number of important longer-term trends more worthy of our focus, as they’re likely to have a bigger, longer-sustaining impact on markets than the Fed’s first rate move. One such market influence that I believe should be getting more attention: The advances in technology happening all around us; innovations already having a huge disruptive influence on the economy and markets.

Market Realist – There are several economic trends and big-picture shifts that warrant our attention. Advances in technology are one of the major changes. We’ll discuss this trend more in the next parts of this series. In this part, we’ll focus on how demographic shifts may have an outsized impact on the way we invest in the future.

Big-Picture Shifts Worth Paying Attention To

The dynamics of the global population are undergoing a paradigm shift. The balance is tilting towards the elderly, with people over 65 representing a greater part of the population than ever before. According to estimates by the United Nations, there will be only 3.9 people of working age for each person aged above 65 years in the world by 2050. The phenomenon of a graying population isn’t limited to Europe (EZU) and Japan (EWJ). It extends to the United States and the rest of the world (ACWI).

Big-Picture Shifts Worth Paying Attention To

The above graph shows how the 65-plus age group is estimated to grow by 111% in the United States from 2010 to 2050 and by 181% globally over the same period. The scope of this demographic shift is immense, and it has not only macro-economic implications but also implications for investors.

An older population is usually associated with lower labor productivity levels, which in turn could drag down economic growth. Plus, older populations have historically saved more, implying lower consumer spending (XLY). An older population is also typically risk-averse, which could mean increased demand for bonds and Treasuries (TLT). On the other hand, older populations perceive equities to be a riskier asset class, so they could avoid them, leading to muted equity multiples (IVV) in the long term. The long-term prospects for the healthcare (IHF) (XLV) and biotech (IBB) sectors could be bright as the population continues to age and the demand for healthcare services rises.

Entitlement spending should also maintain an upward trajectory as the population continues to age. According to projections by the Congressional Budget Office, 60% of the increase in federal spending in the United States will be driven by entitlement programs in 2024 (Sources: The Fiscal Times, CBO). In the absence of improvement in caregiving programs and company policy changes, this demographic shift would translate to muted economic growth.

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