Pop! Goes the Market?

The year is 2011, and the baby boomer retirement wave--the “Geezer Gusher,” they’re calling it--is in high gear.

And so, coincidentally, is a horrendous bear market on Wall Street.

The first of the 75 million boomers turn 65 this year, and they have begun to liquidate the stock holdings they built up throughout the 1990s and the first 10 years of the new century.

And just as the boomers’ nonstop buying pushed stocks to unprecedented levels--in 2009 the Dow Jones industrial average peaked just above 35,000 points, up from 5,700 in mid-1996--their selling now is relentless as they rush to convert much of their stock assets into more conservative investments.

The Dow, now at 25,000, could tumble to 10,000 or less before it bottoms, experts warn, if the boomers continue to unload and the 49-million-member Generation X finds itself increasingly unable or simply unwilling to buy the stocks that the boomers are dumping.

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Could it happen? The short answer is, of course. But whether such a nightmare scenario is probable is something else entirely.

There is no question that the baby boomers, simply by virtue of their overwhelming numbers, will continue to have a profound effect on the economy and on markets. They drove the housing market in the 1970s and ‘80s, the “yuppie” consumption mania of the mid- to late ‘80s and now, as the first of the boomers turn 50 this year, they are shoveling billions of dollars into stock mutual funds each month in a scramble to build up retirement savings.

If the boomers remain enamored of stocks, their retirement dollars should help pump up the market for many years to come. Likewise, if they were to suddenly sour on stocks, their impact on the market obviously could be devastating.

But pinpointing the year 2010 or so as the certain inflection point for a catastrophic market turn--because the boomers will begin reaching the traditional retirement age--is just an exercise in simple extrapolation. And history shows that extrapolated trends often fail to materialize.

Case in point: In 1989, many experts viewed Japan’s economic ascendance during the 1980s as a locomotive force that would continue to power the country ahead of the U.S. in the ‘90s, in terms of industrial competitiveness and stock prices. Wrong. Japan’s economy has bordered on depression for much of this decade, and its stock market remains 43% below its 1989 peak.

Obviously, a lot can happen between now and 2010. Indeed, perhaps the most dangerous thing about guesstimating a boomer-provoked market bust in 15 years or so is that that may imply smooth sailing for stocks until then. Yet there is no guarantee that boomers who choose to save more between now and retirement will continue to do so in stocks.

Let’s assume, however, that the U.S. stock market does rise spectacularly between now and 2010, even allowing for a couple of nasty, but short, bear markets along the way. Who will be there to buy stocks when the Geezer Gusher wants to sell?

A few things to consider:

* The boomers won’t all retire at once. The oldest boomers will be 65 in 2011, but the youngest (born in 1964) will be just 47 that year, and in their prime period of asset accumulation. The people born at the mid-point of the baby boom (1955) will be 56, also still an age at which one hopes to be accumulating investments, not liquidating them.

So the boomer stock sellers of 2011, however many of them there may be, shouldn’t face a shortage of potential boomer buyers--not to mention that many Gen-Xers will then be in prime savings mode as well.

A related point: Although benefits paid by private pension funds will begin to exceed contributions in 2006 because of the rising retiree ranks, the annual investment income then generated by the funds’ assets will be huge, according to a 1993 study entitled “Consequences of Population Aging on Private Pension Fund Saving and Asset Markets.”

“There would be no reason [for the funds] to be net sellers of assets at that point,” authors Sylvester J. Schieber and John Shoven concluded, because the funds--or really, their retirees--will be able to live off the funds’ dividends alone until at least 2020, if not later.

* For many boomers, retirement may never come. The idea of permanently dropping out of the work force and comfortably living off one’s nest egg may have been normal for retirees of the 1960s and ‘70s, but many or most boomers probably won’t have that luxury.

“The boomers have been late in everything they’ve done,” says William E. Chapman II, president of Kemper Retirement Plans, the retirement-planning unit of Zurich Kemper Investments in Chicago. Boomers have tended to marry later, have children later and begin saving later than their parents, Chapman says.

Which means many boomers won’t have the money to stop working at the age their parents did. “ ‘Retirement’ is not going to be a condition where boomers can turn off savings and start drawing down assets,” Chapman says. Rather, many sixtysomething boomers whose health remains good will need to continue working and building assets that will sustain them later in life, he says.

* Older investors don’t--or shouldn’t--exit stocks entirely. Say you’re lucky enough to truly retire at 62. Do you instantly sell all of your stocks, put the cash into a bank savings account and live off the interest? You could--at your peril.

Yes, stocks are risky. But they also are the only liquid investment that offers growth potential and inflation protection (via rising dividends) over time. You can’t get that from bonds or bank accounts.

So if a 62-year-old couple expects to live at least 20 more years, they would almost certainly still want to leave a substantial portion of their assets in the stock market.

* Generation X may turn out to be better off than it expects. The boomers’ hunger for stock mutual funds today is helping to finance an explosion of new stock offerings from up-and-coming companies--from Internet-related firms such as Netscape Communications to hot restaurant chains such as Planet Hollywood.

Certainly, not all of these companies will be prosperous in the long run. But the availability of equity financing gives the American economy the ability to constantly reinvent itself and, most important, to create jobs, especially for people in their 20s and 30s.

“Improved access to equity and debt finance for small and medium-sized companies is important to job creation because practically all of America’s employment growth since 1980 has been concentrated in that sector,” not in blue-chip companies, notes David Hale, economist at Zurich Kemper.

And the healthier Gen-X members become in terms of their earnings and savings power, the more likely they’ll be to step up as stock buyers later in life, when the boomers begin to siphon off assets to support themselves in old age.

* The developing world’s middle class may some day hunger for U.S. stocks. China, with 1.2 billion people, has only the beginnings of a middle class today. Who knows how many that segment of the population will number in 15 years. Ditto for the rest of the developing world.

If affluence spreads worldwide, so too will the desire--and need--to invest in financial assets. Undoubtedly, many Chinese will principally invest in Chinese stocks, Indians in Indian stocks, etc. But just as many Americans today are diversifying into foreign stocks, 15 years from now new foreign investors may be diversifying into U.S. shares--providing liquidity for boomers who want to exit the stock market.

Does this all sound too Pollyannaish? Maybe it is. Yet it hardly makes sense to stop investing in stocks today because of a market crash that might occur 15 years from now. Whether the stock market is in for good or bad times when the boomers begin to retire, the best advice today is the same as it always was: Save and invest as much as you possibly can in a diversified portfolio of securities, lower your risk tolerance as you get older and hope for the best--because nobody makes money waiting forever for the world to end.