What's Missing from the Growth Puzzle

May 20, 2016

As we approach the end of spring, many

investors are checking their account balances before they plan out their summer expenses. At a glance, not much looks different from year-end balances, begging the question, "when will we see growth again?" Asset growth is connected to economic growth, which despite low unemployment, low inflation, and low interest rates, is moving forward at a snail's pace. So, what is missing from the "growth puzzle"?

The not so obvious missing puzzle piece is Boomer spending.

The Boomers are retiring.  Economists estimate that we are about 1/3 into the retirement wave for the generation that made its mark in history as one of the most productive, highest earning, highest spending, and most wealthy generations.

Having many Boomer clients, we have great insight into the spending patterns that exist.  Today,

 

we observe Boomers having more willingness to take excess cash and pay down their mortgages or other debts.  We observe a trend of significant cost of living reductions as their focus becomes planning for long term needs versus how to spend next month's bonus check.

As we move through the next 10 years or so, we expect to see less and less contribution to GDP from Boomer spending.  This will undoubtedly be a drag on corporate earnings growth. Politicians and financial experts may claim that the key to stimulating more growth is this or that, but it's difficult to imagine a real solution for replacing a growth engine like the Boomer generation.

Stealing the tag line from the most recent "Star Wars" movie, "There is Another..", is also true when speaking of a powerful generation that will bring forth a new era of growth in the U.S.  Our Millennial generation (often called Gen Z) has the size, the education, and the prevailing economic climate to usher in several decades of growth in the future.  Demographic studies tell us that this generation is not yet ready to make its financial mark on history, but the inevitable is coming.

Historical data* shows the average peak earning years for Americans are between age 45 and age 55.  Peak demand for minivans, larger homes, and a giant monthly spending budget peaks when families are late 30's / early 40's (5-15 years after having kids.) The leading edge of the US Millennial generation will approach these pivotal years at the end of this decade. We are probably still 8-10 years away from their surge in spending.  But make no mistake, the Millennial generation dwarfs the size of the Boomer generation and they are equipped with technology, work opportunity, and knowledge to create sustainable growth for decades. They just need the proper motivation. Having their own growing kids to take care of should do the trick.  (It always has with past generations.)

BOTTOM LINE: While it's difficult to get excited about high growth 8-10 years from now, for the disciplined investor these transition years can be a great opportunity to accumulate shares of America's greatest companies at reasonable prices. Once the Millennial wave of spending growth begins, many of these companies stand to be very profitable for a very long time.

Feel free to contact us if you have questions or would like to discuss your specific portfolio.  We appreciate the continued confidence and the opportunity to serve you & your family.
 
Best Regards,
Lyn

* Demographic spending data provided by the Harry Dent Foundation and BEA

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