Why Baby Boomers Might Not Drive Down the Stock Market

In the best of times, it's difficult to divine the direction of the stock
market. Arguing that baby boomers will depress stock prices for several years
seems to be a huge stretch. Yet, that is exactly what a research paper released
yesterday by the Federal Reserve of San Francisco tries to do. According to the
paper, worried boomers are going to unload "acquired assets, especially risky
equities" to finance their retirement in the coming years. This "massive
sell-off" might depress stock values. The paper presents a depressing
scenario. "Real stock prices (will) follow a downward trend until 2021,
cumulatively declining about 13% relative to 2010," the paper says . "The
subsequent recovery is quite slow. Indeed, real stock prices are not expected to
return to their 2010 level until 2027." There are a few problems with this
theory. For one thing, forecasting the stock market decades into the future is
risky because there are far too many variables that need to be considered. No
one knows, for instance, whether foreign sovereign wealth funds will buy more
U.S. equities over time. Stock prices also might be bolstered by growth overseas
in emerging markets, which has benefited U.S. companies as domestic growth has
lagged. Then there are more practical reasons. Unfortunately, the state of many
boomers' retirement savings is poor. Many seniors expected to be able to fund
their retirements with the equity in their homes something difficult to do
after the real estate market cratered. This means these investors might be
forced to allocate more of their assets in the stock market than they would like
to generate the returns they need to retire because less-risky investments
won't do the job. Moreover, more people are working later because they either
can't afford to retire or don't want to. In either case, they will delay
tapping into retirement funds for as long as possible because they will grow
tax-free. They also might expect their investments to rebound from the
market's recent volatility and might not want to use them if they don't need
the money for their immediate needs. Boomers need to be very picky about the
stocks they purchase. For one thing, they probably should not be chasing growth
by investing in risky stocks such as Dendreon (NASDAQ: DNDN ), whose shares
tanked since the biotech firm withdrew its 2011 revenue estimate. A better bet
for these investors might be less-risky dividend payers such as AT&T (NYSE: T ),
the telecom giant whose yield is 5.98%; cigarette maker Altria Group (NYSE: MO
), which offers a yield of 5.82%; and consumer products firm Kimberly-Clark
(NYSE: KMB ), which has a yield of 4.18%. Contributor Jim Woods has several good
dividend ETF picks, including iShares S&P U.S. Preferred Stock Index (NYSE: PFF
), PowerShares Preferred (NYSE: PGX ) and SPDR Wells Fargo Preferred Stock
(NYSE: PSK ). The Woodstock Generation might have changed the world when they
were young. An uncertain economic future is changing them in their golden years.
Jonathan Berr does not own any of the listed securities.