Seven reasons why the millennials could lead the next great bull market

The following is excerpted from a quarterly report by Bob Turner, chairman and CIO of Turner Investments. To read the full report, click here.

So, what’s the demographic destiny of the United States? More to the point, are the economic prospects of the millennial generation in the U.S. doomed to resemble those of their peers in Japan and Italy? And if those prospects aren’t doomed, what distinguishing characteristics offer hope that the millennials and the stock market may enjoy a better fate?

One especially prominent distinguishing characteristic of millennials is their connection to technology. They’re known as “digital natives”– the first generation to be raised with technologies such as personal computers, the Internet, and smartphones that previous generations had to adapt to later in life. For instance, they’re reliant (obsessively so, say their critics) on mobile devices; eight out of 10 of them sleep with their cell phone within reach. They’re also highly educated. In 2008, 39.6% college-aged millennials were enrolled in higher education – the greatest percentage in U.S. history.

Dealt a tough hand
Beyond that, millennials have been dealt a tough economic hand to date. When they were graduating from high school, the dot-com bubble burst and sent stocks plummeting. When they were in college, the tragedy of the 9/11 terrorist attacks roiled the global economy and stock market. And the final blow: just when they were beginning to reach their stride in the workplace, they were stymied by the global financial crisis in 2008, which constricted the job market and upended the global economy again.

Though the stock market has since recovered, unemployment has remained high. Before the financial crisis, the unemployment rate hovered around 5%. By October 2009 the rate reached 10% and hasn’t dipped below 8% since, according to the Bureau of Labor Statistics.

The absence of jobs has hit millennials especially hard: 37% of 18-to 29-year-olds are unemployed or out of the workforce – the highest rate of joblessness for this age group in more than three decades, according to the Pew Research Center. As such, they’re more likely to have recently lost a job than people over age 30.

Pessimism overblown
Yes, millennials have their work cut out for them to carve a good financial future for themselves. But then, what generation hasn’t faced – and overcome – its own set of unique challenges? At any rate, we offer seven reasons why the financial prospects of millennials may be much better than is popularly supposed and why millennials may bring about a Great Bull Market of the 21st Century:

Reason #1: the millennial generation is huge.
One of the reasons baby boomers are cited as the gold standard among generations is their sheer size; they number 81.3 million, according to the most recent U.S. Census. But millennials constitute an even bigger generation, 85.2 million strong. They’re the largest generational cohort in the U.S., and we share the view of Dan Wantrobski at Janney Capital Markets, who believes that millennials’ strength in numbers could signal a coming boom in stocks.
It wasn’t until baby boomers had reached their early- to mid-30s that they truly began to make their presence felt in the stock market. The Great Bull Market of the Century was the result. Most millennials are still finishing college and haven’t yet attained some semblance of financial maturity and means. In our view, as they do acquire more financial maturity and means over the next few years, as they enter their prime earning years, they will put their money to work, to the benefit of the economy and the stock market.

Millennials still getting settled
Reason #2: millennials’ financial struggles thus far are typical of early adult life.
When he was 29 years old, eventual five-time Cy Young Award-winning pitcher Randy Johnson seemed bound for an erratic, middling career. But when he turned 30, he mastered the art of locating his pitches and became dominant, ultimately winning 303 games and striking out the second-highest number of batters in major-league history.

Just as it was too early to judge Randy Johnson at age 29, we think it’s premature to make lofty, pessimistic pronouncements about the financial prospects of millennials when their track record is still so short. Take a moment to think about the difficulties you encountered in your 20s – events such as completing your education, starting your first job, relocating, making living arrangements, and learning the vocational ropes.
These rites of passage in early adulthood are hardly the stuff that the financial wherewithal of serious investors is made of. The financial wherewithal tends to come later, after early adulthood.

Reason #3: the macroeconomic headwinds that millennials are facing are in all likelihood only temporary.
The macroeconomic problems that have dogged millennials – like high unemployment and a depressed housing market – are fading, albeit slowly. Though unemployment has remained above 8% since its peak in October 2009, it has fallen almost every month since then. What’s more, it’s falling more rapidly for those aged 25-34 than for the rest of the population. At the beginning of this year, unemployment among 25-to-34-year-olds fell from 9% to 8.7%, its lowest level in more than three years. And the proportion of people in that age bracket who are employed has risen slightly, from 74.5% to74.7%, since January 2009.

Household formation rebounding
Also, the formation of new households declined after the financial crisis partly because many jobless millennials moved back to their parents’ homes after college. Now, however, new-household formation is recovering and is forecast to reach 800,000 this year and 1.1 million next year. Overall, new-household formation should exceed 1 million annually over the next five years, according to Goldman Sachs.

And although the housing market has yet to recover, the worst may be behind us, says a report by The Demand Institute, a nonprofit consulting firm. The report projects that seasonally adjusted housing prices will grow by just under 1% in the second half of 2012, by 1.5% in 2013, and 2.5% in 2014, ultimately reaching 3-3.5% annually between 2015 and 2017.

Reason #4: baby boomers once faced similar macroeconomic headwinds, but they still were able to invest in stocks subsequently and drive the market to new highs during their peak-earning years.
The economic indicators confronting baby boomers before the bull market of the 1980s and 1990s were far from auspicious; in fact they were downright bleak. For instance, between January 30, 1976 and March 3, 1978, the S&P 500 Index lost a cumulative 11.85%. In 1979, skyrocketing oil prices resulted in a global energy crisis and gas-station lines nationwide that stretched for blocks. In 1980 the inflation rate hit a whopping 13.5%. In 1982 the interest rate on 30-year mortgages was 15.5%, and the housing market had stalled.

Boomers rose to the challenge
As if all that wasn’t bad enough, baby boomers experienced another financial trauma when the stock market plummeted in 1987. On October 2, 1987 the S&P 500 Index was trading around 328 after rising for most of the year. By December 4 the S&P 500 had plunged to about 223, a 32% decline. But the S&P 500 quickly recovered and rallied in the 1990s, gaining 18.2% annualized, thanks largely to the boomers.

We think the millennial generation can be the same kind of stock-market catalyst going forward, and we agree with Dick Hokenson, managing director of global demographics at ISI Group, who related this story about a previous generation worrying about the future of baby boomers: “I can remember being told back in 1980 by portfolio managers that their children would never achieve the standard of living that they did. Then I reminded them (gently, of course) that they did not start out in places like Greenwich [a highly affluent Connecticut suburb]. They started out in places like Flatbush [a working-class section of Brooklyn]. Lo and behold, their kids did do well.”

Reason #5: despite all of their financial troubles, millennials are savers and are already investing in stocks.
A 1978 documentary, Scared Straight!, showed a group of juvenile delinquents being screamed at by inmates at Rahway State Prison, in the hopes of frightening the youths out of their criminal tendencies. Similarly, the plunge of financial markets in 2008 and the ensuing credit freeze scared millennials into saving money and reducing debt. Only 24% of millennials have more debt than savings, compared to 31% of baby boomers, according to Bankrate.com.

Am I saving enough?
Millennials place as much importance on their finances as other generations do. For instance, the Pew Research Center notes that 77% of adults under age 30 worry they aren’t saving or investing enough. This is about the same rate as those aged 30-45.
Also, 20-something investors have more stocks in their 401(k) accounts today than their counterparts did a decade ago, according to the Investment Company Institute and the Employee Benefit Research Institute. About 80% of 20- somethings had devoted at least 60% of their 401(k) accounts to stocks in 2010, the year for which the most recent statistics are available. In 2000, only 70% of young investors held such a large allocation in stocks.

Reason #6: millennials have a winning personality.
No, by that we don’t mean millennials are always a hit at cocktail parties. Rather, they tend to be unflappable optimists who are willing to take risks – two traits that bode well for their involvement in the stock market.

Despite recent economic upheaval and political gridlock, millennials are more optimistic than older generations about the state of the nation. To be specific, 41% of millennials are satisfied with where the U.S. is headed, compared with 36% of generation X, 23% of baby boomers, and 14% of the so-called silent generation (people born from 1925 to 1945), as revealed by a Pew Research Center poll.

160,000 new firms monthly
Perhaps most significantly, millennials have a pronounced entrepreneurial spirit. About 29% of all entrepreneurs are millennials, who launch about 160,000 new businesses a month, the Kaufman Foundation says. And they tend to be a tad unconventional, if the more than one-third of them who have tattoos are any criterion.

We’re not sure what such a high incidence of tattoos portends for millennials as investors, but we think their entrepreneurial bent suggests they have a distinct appetite for risk. That appetite is inclining them – and, we think, should continue to incline them – to invest in stocks. (Ironically, stocks are widely perceived as “risky” assets, but they actually are the least risky asset class in the long run. Stocks have produced relatively predictable – and relatively high – average total returns exceeding 11% in 20-year periods since 1926, according to Ibbotson Associates. Of course, past market performance is no guarantee of future results.)

Reason #7: millennials are putting emerging nations in a demographic sweet spot.
Globally, the fastest growing economies are those of emerging nations in Asia, Africa, and South America, due in no small part to their relative youthfulness. When a country’s population is disproportionately young, it brings economic growing pains; a large number of dependent children tend to dampen economic growth. And conversely, when that army of children finally marches into old age, caring for them tends to diminish a country’s productivity. But in the years in between, when that segment of the population is of working age, a country’s economy, productivity, and living standards can rise at above-average rates. And a better economy, improved productivity, and a higher standard of living are typically accompanied by heavy investment in stocks.

In emerging nations, millennials are pumping up working-age populations. In 2010 the ratio of workers to the total populace in East Asia rose from 46.8% in 1975 to 64.1%; in Latin America, from 43.8% to 56.3%; and in South Asia, from 45.2% to 54.8%. As we see it, a sizable new class of investors is surfacing in emerging nations that could help boost stock markets at home and abroad.

The philanthropist and author W. Clement Stone observed, “Regardless of what you are or what you have been, you can still become what you may want to be.”

When it comes to millennials, we think Mr. Stone’s sentiment is more than self-help doggerel; it’s an apt description of how we think millennials will likely take control of their financial destiny and aspire to become stock investors of increasing substance. We think their sheer size, their outlook, their saving habits, their growing presence in emerging nations, and the fleeting nature of their current financial and macroeconomic predicaments could enable millennials to become a major force in investing – a new generation that powers a bull market in stocks over the next two decades.

Related Topics: 61 IQ Center, Gen Xy Investing