Why Declining Population Growth and Sluggish GDP Growth are Not a Concern for Investors

Over the past few months on communities such as Reddit and Hacker News I have seen investors express concern about the implications of falling US population growth as it pertains to future stock market returns, in that declining or sluggish US population growth will hurt returns going forward.

I think such fears are unsupported by the evidence.

1. Emerging markets, which tend to have high rates of pop. growth, have significantly lagged the S&P 500 and other developed markets since 2011. Compare the returns of Turkey, Brazil, Mexico, or Egypt to the US, Germany, or Japan. Same for dollar-adjusted GDP growth, with the US coming out way ahead of many developed and emerging market economies, even countries with much higher rates of population growth. These trends have further accelerated since Covid. 2-3% US GDP growth may not seem like much, but it beats Central America, the Middle East, Russia, Japan, much of Europe, etc.

2. There is an inverse relationship between population growth and how developed a country is; African countries tend to be underdeveloped and have high rates of population growth.

3. Rather than population growth, what matters more is geopolitical stability, stability of the currency relative to US dollar, innovation, per capita wealth, real GDP gains, etc. Increased productivity means that fewer people are needed to produce the same quantity of economic output. Forex risk and volatility posses a much greater risk for foreign investors and foreign economies than declining population growth. We see this with Brazil, Turkey, and Russia, whose economies have been hammered and deficits have surged due to falling currencies (relative to the US dollar, Pound, and Euro), political instability (not the media-generated hype that we see in the US about Biden vs. Trump [1], but regimes at risk or being overthrown, massive and widespread corruption, rampant crime, and other problems), ‘brain drain’, and or falling natural gas and other commodity prices.

4. Density of wealth is more important than total wealth or total population. This is why Silicon Valley real estate and tech stocks have been such good investments; not because of booming population growth in the Bay Area, but because of an increasing concentration of wealth in the Bay Area and wealth flowing into a limited number of valuable companies and neighborhoods, which leads me to the next point:

5. But what if declining population growth hurts GDP? Corporate profits matter more so than GDP. In fact, investors should not care much about GDP despite all the headlines and hand-wringing about GDP. This may seem like heresy, but it’s borne out by evidence. Consider that the S&P 500 over the past decade has produced 15% annual returns in spite of sluggish GDP and sluggish population growth, yet valuations for stocks are not that high either, suggesting it is not an asset bubble and has much further to go.

How is this possible? Profits for tech and other multinationals are the fattest ever and keep expanding, even in spite of slowing or negative population growth and possibly sluggish GDP. So this means more money for shareholders. When investing, you are not investing in GDP or other metrics, but rather in companies; specifically, in the ability or projected ability of companies to return money to shareholders–and or–to generate shareholder value. Although this is correlated to some degree with GDP, it’s hardly direct. GDP is a rather crude measure…all it tells you is if the overall economy is epxanding or contracting , but tells you little about what is inside it.

If a multinational tech company such as Google, Microsoft, or Facebook can generate 30% profit margins every year even in a sub-1% population growth and sub-3% GDP environment, then that 30% must in some way still go to the shareholders. It’s like taking $100, turning it into $130, and then repeating it over and over. This explains why tobacco stocks were such a good investment in the ’60s and ’70s despite the US economy otherwise being weak, because those tobacco companies were able to return huge consistent, recurring profits to shareholders in the form of dividends, which could be then reinvested.

[1] That’s not to say the US does not have its own problems–the 2020 George Floyd/BLM protests, the events of Jan 6th, and a nation that seems as divided as ever along a fault line of irreconcilable ideological and political differences–but the key difference, which is overlooked by the over-hyped pundits and overpaid experts, is that America’s problems, unlike that of Brazil and elsewhere, are in no way economically destabilizing. In fact, it’s the opposite: media and big tech companies boomed in 2020-2021 as millions of Americans compulsively refreshed their social media accounts and favorite news sites, clicking ads in the process, to get the latest updates on the BLM protests, Covid, and the 2020 U.S. presidential election and the contested results, while exchanging barbs with each other about who stole the election from whom, about the efficacy or lack thereof of masks and vaccines, ‘cancel culture’, etc…

For example, in Brazil, in 2017 when a major corruption scandal came to light, the Brazilian stock market had one of its worst days ever, falling over 10%. By comparison, the S&P 500 was unfazed by the Jan 6th protests. Part of what makes the US so impervious to all this social dysfunction and division within it, is because of its bedrock that is the private sector, a resilient consumer culture, and individual property rights; foreign countries tend to be weaker in regard to all of those.

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