I’ve spent the last year scratching my head over the continued (and rapid) stock market rise amidst government uncertainty at home, geopolitical threats abroad and an increasing and ominous distance from our last recession. Large tax cuts for corporations certainly explain the recent run-up, but what of a near doubling over the last five years despite relatively flat GDP growth? What gives?
I am increasingly convinced the optimism ties to an impending once-in-several-generation consumption and investment boom kicking off as the millennial generation matures into peak child bearing and earning years. For those of you who read my posts for discussion of esoteric SaaS metrics, apologies, this is a big picture one!
Below is a GIF of the US population trend since 1990. (hooray, I made a GIF!) It shows a welling of the millennial wave, now eclipsing the baby boomer bulge.
We hear about this, but it is perspective altering to actually see the trend. The millennial wave now eclipses boomers for two reasons. The boomer bulge is declining as many reach the end of their lives. Meanwhile, the record levels of immigration seen in the US from the late ’90s through the mid-2010s have largely bulked up the millennial wave since its native creation in the 80s and 90s. Immigrants tend to be younger, working age or with children soon to be. This isn’t a political piece, but I’m certainly happy to have a larger working population in the US because of this trend.
This millennial boom is entering prime childbearing and earning years, the former being the largest driver of consumption (nesting), and the latter the means of consumption. This picture is quite changed from the 2010 archetype of millennials returning home to live with mom and dad after a failed job search in a post-financial-crisis economy. While it is true that millennials suffered cyclically oversized unemployment after the financial crisis, relative employment level by age has normalized. But, of course, that doesn’t stop them from whining 🙂
The next decade will also buck the belief that millennials will be different – not get married, not live in the suburbs, wait to or not have kids, not make big purchases in favor of sharing economy and experience consumption. Millennials certainly drove the urban resurgence, but many cities have already experience “peak millennial”. Rents in posh 1 and 2 bedroom apartments are starting to decline. Where are Millennials going? Millennials represent 34% of home purchases in 2017 (the largest group), 66% of which were first time purchases. And wait for it, more than 90% of these purchases were single family or townhouse, with the smallest percent of purchases being of apartments (only 1%) of any age group. They are moving out of the city; what, are they going to buy cars next? Yes. Millennials likely surpassed both Gen X and Babyboomers in new car purchases in 2017. Millennials nest too, and it’s hard to rely on Uber when two car seats follow you everywhere.
This is only the beginning. Fewer than 50% of millennials have had children yet, but most want to. And while marriage is delayed versus other generations, Millennials are compensating by having kids outside of marriage anyway. More babies, more spending.
The other big trend is that millennials are now moving through the steep part of the income/age curve:
While the youngest millennials fall into an age/income bracket with median incomes around $30K/yr, the oldest millennials have reached the asymptotic median income for 35 and above of around $50K. The bulge will only continue to move toward this higher level, enabling more spending.
Is this enough to offset the aging and retiring boomers? Well, for the first time in a century, US life expectancy has leveled out, or even dropped. This is good and bad news. The bad news is we may not live the longer and longer lives we once thought. The good (economic) news is that the expected drag from a bulge in retired non-“producing” population is likely to be lighter than once anticipated. We might also expect a higher participation in the workforce from millennials than among baby boomers given greater acceptance (and often expectance) that women enter and remain in the work force. Surprisingly, however, millennial labor participation is lower than in recent decades, perhaps a hangover from the stunting unemployment millennials initially faced during the financial crisis. We’ll see if this sustains, however.
So, if there’s a lot going for the american economy, should we all go out and buy more equities? Nothing above divines a stellar ’18 or ’19 in the markets. In fact, there feels like a lot more black swan risk in ’18 than in the prior few years. Hold onto your seats if domestic or geopolitical issues turn the wrong way: Watergate saw a 24% market decline from break-in to resignation, and we’ll be worried about more than the market if nukes fly. Nevertheless, between millennial trends and our continued leadership in technology innovation, the fundamentals are good, and I am long the next decade.