Demographic Trends: Positive or Negative for Stocks?
Two weeks ago I attended the annual Ned Davis Research (NDR) conference. At this terrific two-day conference, I was able to learn, listen, and network with leading stock, bond, political, macro, and sector experts. The conference focused on the current environment, managing risks, and taking advantage of opportunities in both the short and long-term. Insights on demographic trends can help us accomplish all the above, so it is no wonder I found the session on demographics informative. Importantly, it connected with the long-term bull market theme I have discussed in various blog posts (most recently in the one dated March 28, 2019). Here are some of the key takeaways from the session on demographics.
- Over the next 10 years demographic trends are favorable for equity markets.
- This supports the long-term bull argument.
- Millennials are now the largest generation in the U.S. and are entering their peak spending years.
- Due to a high level of average education and student debt, spending and family formation has been delayed relative to historical generations.
- However, data shows millennials have similar spending habits and desires as previous generations and the percent of income spent on student debt is declining.
Demographics within Bull and Bear Markets
Millennials are now the largest generation. There are 90 million people in the U.S. that were born between 1980 and 2000.
The MY ratio (those aged 35-49 to those aged 20-35) rising and falling has historically been co-incident with long-term bull and bear stock markets. Basically, it is good for the economy to have more of its population in peak spending mode than those in low spending mode, and those aged 35-49 tend to be peak spenders and those aged 20-34 tend to be low spenders.
The 1980-2000 bull market in stocks coincided with the core of the Baby Boomer generation hitting peak spending years of 35-49. The bear market from 2000-2010 was a period when the MY ratio was declining. We are now entering, over the next 10 years, a phase where Millennials will enter their peak spending years and the MY ratio will be favorable again after bottoming over the last 10 years.
There is alignment with demographic trends and the history of bull markets. We are ten years into this long-term bull market and demographic trends look favorable for the next 10 years. Historically bull markets have lasted about 20 years.
More about Millennials
Some wonder whether Millennials spend differently than previous generations. Data shows they are essentially following the same trends as previous generations and have similar desires as previous generations.
Millennials are the most well educated, as a group, generation in history. This is a good thing! It should lead to continued innovation and productivity. This leads to higher GDP per capita (better living standards). However, they have more student debt than any other generation as well. This hinders spending and growth.
The good news is that average income has risen more than average debt. Average debt payments as a percentage of income is clearly trending downward. This has only delayed the average age of family and house formation, but has not changed the desire for it.