Millennials and Boomers Shape the Economy

If you review the 2009 to 2014 timeframe, the financial experts suggest a simple investment strategy. Find the stocks that performed horribly, lagging far behind the market leaders.

Stock Market Performance
“You want to buy stocks of the companies where that extra income is going to be spent. That could make technology, for one, a big beneficiary, as well as healthcare and entertainment.”

An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.

Part Three in a 3-Part Series.

Part One: Tomorrow

Part Two: What Lies Ahead?

Please remember.  Check in with your financial planner as the following trends and opinions change and may have before you read this.

Rules of Thumb

Is there a rule of thumb you can count on going forward?

You know like “buy low, sell high.”

As they say in my family, it’s all relative.

 

If stocks earn 4% a year, but cash in the bank earns just 1%, stocks still win by a long shot.

  • So Baby Boomers will have to stay in the stock market for a portion of their portfolio.
  • For Millennials who invest on a regular basis in an IRA or 401(k) plan, and who won’t need to tap into their funds for two decades or longer, just buy and hold.
  • Unlike the Baby Boomers who fear a significant loss over the next five years, don’t fret about bad financial news.

In fact, root for falling stocks, because you’ll be getting more shares for your money.

If you review the 2009 to 2014 timeframe, the financial experts suggest a simple investment strategy.

Find the stocks that performed horribly, lagging far behind the market leaders.

Tracking Winners and Losers

While the market leaders run out of steam, the laggards will probably …

beat U.S. returns over the next five years by buying low to  eventually sell high. But psychologically, it’s hard to buy losers.

 

Losers like:

  • Foreign stocks and bonds.
  • Emerging-market stock funds .

They’ve lost 5.8% a year.

“We’re expecting to raise our positions there in the back half of 2016.”

Understand the risks, though.

In a world where a stronger dollar and weaker currencies depress the returns for American investors in foreign markets it may be time to nibble here and there.

Bears vs. the Bulls

“It will never be obvious when the markets, or their currencies, have hit bottom. next five years.” 

  • In a reversal, financial advisors and economists expect China’s share of global growth to fall to 21%.
  • But, they expect emerging economies’ share to climb to 34%.
  • And, previously out of favor European and Japanese stocks will continue to benefit from their central bank policies aimed at keeping interest rates at rock bottom to support growth.

But there’s no getting around the fact that …

“the world will face a financial crisis rooted in mammoth debt levels.”

  • In 2016 a pivot in pay increases will be welcome news in the U.S. households.
  • But, maybe not for stockholders as promotions and bonuses usually come at the expense of corporate profit margins.

And, the grass is greener.

Getting Ready for Musical Chairs

The percentage of talented employees voluntarily quitting their jobs for better opportunities is the highest since early in the Great Recession.

Typically though …

“It takes a long time for people to realize they’re in a better bargaining position.”

That can change quickly thanks to the Internet and social media.

Once trading places begins, Millennials and savvy Gen Xs can take advantage of a powerful means to discover which companies are good ones to work for and which to avoid.

Consumer Behavior Influencing Stock Performance

It won’t take long for workers who feel under appreciated to make the jump.

And, that’s great, right?

“In a perfect world, rising wages would spark a ‘virtuous circle’ where workers would boost spending, driving up demand for goods and services. That would lift business sales and earnings, in turn allowing companies to continue raising wages.”

 

A virtuous circle takes time to develop in a less than perfect world like the one you and I live in.

But, here’s another simple rule of thumb.

Changing Tech Leaders
  • Where the real economy may influence the stock market.
  • Where consumer spending by Millennials and Baby Boomers may figure into gains in your portfolio.

As one expert put it.

“You want to buy stocks of the companies where that extra income is going to be spent. That could make technology, for one, a big beneficiary, as well as healthcare and entertainment.”

 

Steps:

(6) Anticipate changing circumstances and economic cycles.

(7) Persist and pivot to navigate external threats and opportunities.

(17) Sketch out your trajectory in 5-year time frames.  Will we fall into another recession?  Absolutely.  Will you be ready this time with future-proofed strategies?

(19) Anticipate the growing shifts in life and business. Nobody wants to swim upstream if the current is moving everything in the opposite direction. Clue your fans in.

What Lies Ahead?

So, the forecast remains turbulent with plenty of volatility

Market Cycles
Harry Dent years before even predicted the “Mother of all Depressions” lasting well into the decade beginning in 2010 and lasting until 2020.

An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.

Part Two in a 3-Part Series.

Part One: Tomorrow

Please remember.  Check in with your financial planner as the following trends and opinions change and may have before you read this.

What about the 25 year old Millennials?

Many, if not most of the college educated are burdened by student loans and high rents that eat up a huge share of income.

Good news for landlords, probably not so much for the starter home demand, yet.

But, for those who successfully found good employment with a fresh start on a career path, even if their pay rises they’re reluctant to  spend — or take a chance on a new job — so, don’t count on a broad positive impact on the economy just yet.

Their risk aversion may be one of the biggest overhangs from the Great Recession.

Look, they witnessed the financial woes their parents or friends endured after the 2008 crash.

While the demographic trends probably aren’t as negative for growth, you should account for them and prepare to adjust in any long-term scenarios you construct.

Obviously they’re the early adopters for companies including Airbnb and Uber..

And as another expert cautioned …

It’s impossible to know in advance how many business ideas will spring up to disrupt or even replace existing industries.

The period after the 2008 financial crash turned out to be pretty decent for the U.S. economy.

Many economists and financial news channel pundits peddled dire forecasts in 2009 and 2010.

Harry Dent years before even predicted the “Mother of all Depressions” lasting well into the decade beginning in 2010 and lasting until 2020.

Instead, by the end of 2015 …

  • The official unemployment rate is back to 5%. 
  • Corporate earnings reached record highs. 
  • And a venture capital boom has funded thousands of promising start-up companies.

But, what lies ahead?

Have we celebrated too soon?

  • The contrarian message appears more reasonable.
  • The economy and markets face challenges that could make the next five years very different.

Like what?

  • Don’t expect more than “low single digit returns on stocks and bonds.”
  • The annualized investment returns will be lousy as the January 2016 steep plunge foreshadowed.
  • Were talking 4% to 4.5% roughly half of what wealth managers plan for their clients.

And, that’s through the end of the decade

So, the forecast remains turbulent with plenty of volatility.

News at 11.

Will we ever return to tried and true savings vehicles for the Baby Boomers hitting retirements like their parents swore by?

One economist says don’t hold your breath,

“As for bonds, with yields so low it’s mathematically impossible for fixed-income securities to earn high returns.” 

How is that possible?

Five years ago a 10-year U.S. Treasury note was paying 3.5% in annual interest. 

Now, new notes pay 2.11%. The drop in yields means older, higher-yielding bonds have risen in value, boosting their “total return” — interest plus principal change.

Yeah, so?

But with the Federal Reserve’s decision in December to begin raising short-term interest rates from near zero, it becomes more difficult to imagine longer-term rates declining significantly, barring a new recession or global shock. 

Here’s what hurts my brain when wrapping my head around bonds.

  • If longer-term rates stay where they are, all you earn is the interest. 
  • And if market rates rise, older bonds will fall in value, offsetting some or all of your interest earnings.

Steps:

(6) Anticipate changing circumstances and economic cycles.

(7) Persist and pivot to navigate external threats and opportunities.

(17) Sketch out your trajectory in 5-year time frames.  Will we fall into another recession?  Absolutely.  Will you be ready this time with future-proofed strategies?

(19) Anticipate the growing shifts in life and business. Nobody wants to swim upstream if the current is moving everything in the opposite direction. Clue your fans in.

Equity

“Buy land, they’re not making it anymore.” — Mark Twain.

Unlocking Equity. From www.SeniorLiving.Org
Figure out if you should unlock that equity for investments.

Or more specifically, how to tap into your source of capital to fund your retirement.

Part One in a 4-part series weighing the pros and cons of investing in real estate over the course of a life time.

Nest Egg

Leaving aside rental and commercial property or other indirect forms of investing in real estate, such as REITs, a more common scenario involves typical homeowners.

Those who bought years ago, paid off their mortgage or will have shortly and despite the negative impact of The Great Recession managed to build a decent amount of equity.

Point one.  

Don’t take what follows as financial advice.

If you haven’t consulted professionals, well, what are you waiting for?

Do so at once!

Back in February of 2007 I read a FidelityReport published by Fidelity Research Institute that compared unlocking equity for investments to risks and relative returns of stocks, bonds and cash.

Point two. 

Fidelity emphasized how much a home, and therefore it’s equity, is subject to market cycles.

History lesson.

Previous generations of Americans treated home equity as an illiquid asset being built up almost invisibly as mortgages were paid down. 

History Lesson

They considered this growing equity either as an “asset of last resort” or as a source of bequests to heirs.

And, of course, back then those homes cost what a luxury car today goes for today.

So, it’s no surprise that future generations are on track to carry much larger mortgages.

And, they will continue to do so into their late middle age and even deep into their retirement years

… perhaps on the assumption that these larger debts will be compensated for by a continued rise in home values.

By 2007, more than 80% of all Americans over age 65 owned homes.

The median price of new homes in the United States has averaged an annual appreciation rate of 5.9% since 1963.

Point three.

Fidelity cautioned, even before the more recent Great Recession

Market Cycles

… historical experience suggests that real estate investments can suffer serious and sometimes prolonged downturns. 

Sometimes it can be across the board.

But, baring a prolonged deflationary slump teetering on an economic depression, it is certainly true for local regions struck by extended economic decline.

Local real estate prices and your return on investment rise and fall with economic factors

… such as interest rates, per capita income, building costs and unemployment rates. 

Shifts in your mortgage loan market can reduce your monthly payments.

Those innovations make housing more accessible.

Like variable rate and interest only loans.

But, they don’t come without their own set of risks.

Beyond the loan market, don’t forget to monitor important variables expanding or constricting the local supply of real estate properties.

  • General availability of land.
  • Land use restrictions.
  • Tough zoning rules.
  • Building regulations.
  • Slow administrative procedures.

And, of course shifts in demographic trends

  • Population growth.
  • Migration patterns.
  • Immigration rates.
  • Average household size.
  • Household formation age (individuals in their thirties).

Fidelity said American real estate values endured three sharp “corrections” during ten-year intervals.

  • From the early 1970’s to the early 1980’s.
  • During the early 1990’s.
  • And, during The Great Recession at the end of the 2000’s to mid 2010’s

With the severity and duration of the downturn that occurred in 2006 still uncertain (published in 2007).

Fidelity tracked investment performance back to before you were born.

How did they say real estate investments held up?

Returns on a dollar invested in residential real estate in 1963 have been only lightly better than returns on low-risk Treasury Bills.

What about compared to stocks, then?

Over this more than forty-year time period, real compound returns to stocks outpaced realty, averaging 5.95% versus returns of just 1.35% to real estate after adjusting for inflation. 

Downturns and Rebounts

So, if you took a dollar and invested it in the 1963 stock market it would have “compounded to $12.36 by 2006.”

But, the same dollar invested in real estate would have grown to just $1.79. 

What about those higher appreciation regions on the coast?

Golden Gate Bridge
On the West Coast. Golden Gate Bridge. Courtesy of http://www.burningwell.org/gallery2/v/Objects/100_5478.JPG.html

Even the highest appreciating regions of the country, the Northeast and West Coast, only realized real returns of 2.35% and 2.49%, respectfully, and underperformed the returns on bonds at 2.74%.

Don’t they say past performance isn’t a guarantee of future performance?

Still data are data.

Home values have underperformed stocks and bonds in terms of average annual returns over every five- and ten-year period from 1963 to 2005, but have only been slightly above the returns on treasury bills.

Why bother, then?

Part Two: Five Options for Unlocking Equity

An excerpt from Book Four in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Rocky Mountain State.