Stock trading still well below highs

Stock trading, as measured by the turnover ratio, is still well below record highs. The turnover ratio is the total value of shares traded during the period divided by the average market capitalization for the period. The steep drops in the turnover ratio are particularly evident for the United States (US) and the United Kingdom (UK). In 2010, the UKs turnover ratio stood at 101.9% a value not seen since 2003. The turnover ratio is still trending down.


A lower turnover ratio may be better for buy and hold investors since a lower turnover may reduce volatility. A lower turnover ratio is also a sign of less interest in stock markets.  There is some evidence, from the US and the UK, that seasoned older investors, after have being burned by the 2000s, are moving money out of equities and into fixed income. This demographic shift is of concern because as the baby boomers consolidate their wealth in less risky assets, lower turnover ratios may remain below their peak values for many years. Moreover, many younger investors are also wary of investing in equities and prefer to invest in bonds, even as bond yields sit at record lows. If these two trends continue, it may take a long time before we see a big increase in stock trading.

Demographics and the Stock Market

There is some interesting recent research out of the San Francisco Fed on the relationship between demographics and the stock market.

"Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades."

The authors, Zheng Liu and Mark M. Spiegel, estimate an error correction model for the p/e ratio and the M/O ratio and then use this model for forecasting the p/e ratio. The details are in their paper. The M/O ratio is the middle-age cohort, age 40–49, to the old-age cohort, age 60–69.

 

" The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027. On the brighter side, as the M/O ratio rebounds in 2025, we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010."

It is hard to argue with demographics.