In 2002, I wrote in the London Evening Standard, This is Money's sister title, about an appealing theory that claimed to accurately predict the future for the stock market. The prediction? US shares would race higher before beginning a decade-long slump in 2008. UK shares would be close behind...
'Investors should brace themselves for one of the most powerful rallies the UK has ever seen before the stock market falls into a Japan-style recession that could last for a decade or more. A slide in London house prices, starting from about 2008, is expected to be the first sign that the good times are over in the UK before the economy - and share prices - languish until at least 2022.
'The theory goes that a tidal wave of babies born after the Second World War is reaching the optimal spending age of 46 - couples begin to spend more because their children fly the nest. In marketing circles, it is known as the Harley-Davidson effect: the biggest buyers of the bikes are men in their fifties. This spending drives the economy and, therefore, stock markets.'
London Evening Standard, 8 March 2002
So crudely, the theory is based on sex. More accurately, it relies on demographics to forecast changes in the economy and share prices.
Harry S. Dent, leading cheerleader of the theory in the US, used demographic charts to predict the Nineties shares boom with startling accuracy. This explanation and chart sets out his theory.
He was also able to correlate Japan's ageing population with a bear market for the Nikkei shares index from 1990 to 2004/05.
He then pored over his graphs and predicted an unprecedented shares boom for the US and other western economies - he wrote a book called The Roaring 2000s.
When I wrote the Evening Standard article in 2002, the theory was falling down. Shares had, in fact, slumped, post-dotcom boom. However, it turned out to be a temporary correction and share prices have since risen rapidly, although nowhere near as spectacularly as Dent predicted (in the Nineties, he set a 30,000-point target for the Dow - its current level is around 13,500 points).
But the underlying trends were right, with the longest sustained growth in economies both sides of the Atlantic.
The theory has a bigger fan-base in the US. But there are also some British demo-zealots - Alan Steel, an Edinburgh-based financial adviser and demographic hobbyist, still avidly follows Dent's updates. He suggested I point out to readers the Office of National Statistics graph on demographic structure (2006), which perfectly illustrates the baby boom in the UK which first came after the war but then came through in a much stronger wave in the 1960s. By far the larger baby boom was in the Sixties (pictured).
The demographics orginally suggested the rot would begin in the US in 2008 and a few years after in the UK (the difference is down to GIs returning quicker than British troops who were stationed longer after the war in Europe). So we should expect a few more years of sparkling gains before the slump, which, the charts say, will last beyond 2020.
The most recent Dent update in 2006, however, put back the decline to 2009 'when oil prices hit $100'. Note: the price of crude was a whisker away from $100 a barrel last month.
So should we trust the theory? Should we follow the advice and ditch our general holdings to buy shares in health and pension companies (that will benefit from the ageing population), and funds that invest in emerging markets with young populations, such as Latin America? Should we all buy bungalows in Bexhill?
My previous attempts to prise a new UK assessment from Dent have been fruitless. The organisation is entirely US-focused. I'll be trying again in coming weeks. I'll also talk to experts about the impact of globalisation and immigration on the theory - especially given the recent influx of more than a million people to British shores.
And in my next blog post, I'll also give details of a worrying indicator that accurately predicts house price crashes: it's flashing red for the UK and 2008.
- Andrew Oxlade, Editor, This is Money
>> Financial predictions for 2008
>> FTSE 100 'could fall 1,200 points in 2008'
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