The bears have argued that as our baby boom population shifts from riskier investments such as the stock market to fixed income, the market will begin to plunge. That is, of course, when interest rates begin to rise again as they inevitably will. However, the baby boomer population is approximately 77 million while our millennial population (like myself) is made up of 86 million. The millennials contain more than 10 percent more as a group than our baby boomers.
The millennials are born between 1981 and 2000, and have witnessed a great recession that has spooked them out of the market. They have seen more bear markets than bull markets, and heard stories of their parents or friends losing a large percentage of their savings/investments. Word of mouth has certainly kept young investors on the sidelines, as they view the stock market as a risky venture. They have also been through a tumultuous unemployment period, where student debt has plagued them along with the extreme difficulty in finding a career.
All of these factors have essentially left a majority of our population out of the stock market for the time being. According to the Census Bureau, the home ownership rate of the millennials under the age of 35 has dropped to 36 percent in 2012. In 2001 and 2004, this ownership rate for the millennials was 41 percent and 43 percent respectively. Similarly, the demand for autos and other major purchases has been set back due to lagging employment numbers.
Large auto companies, such as Ford (NYSE:F) and General Motors (NYSE:GM), stand to greatly benefit "down the road" even more so as the millennial population shifts into their 30s and begins to stand on stable ground. Ford has had a 52-week range $8.82 to $14.30 according to Yahoo! Finance. Ford has already begun to see an increase in their sales as a gradual improvement in employment numbers has been reported. There still remains a great deal of pent-up demand, as the 20-year old millennials reside in cities that do not require automobiles. Similarly, the unemployed millennials, who compose a large majority of the unemployed population, are still unable to afford major purchases such as automobiles.
Homebuilders such as Lennar (NYSE:LEN) and Toll Brothers (NYSE:TOL) also are poised to greatly benefit from this pent-up demand in home sales that is bound to happen. A good portion of the millennials is gradually shifting into stages of buying homes. With due time, a wave of the millennials will be purchasing homes and give these homebuilders a further push to the upside. Lennar has had a big move to the upside in the last year in particular with a 52-week range of 23.48 to 43.22 according to Yahoo! Finance.
As the millennials move into their 30s, they will be automatically enrolled in 401k plans, as opposed to the baby boomers having an option to sign up. These 401k plans invest in a mixture of stocks and bonds, which is allocated based on the portfolio manager's discretion. For the most part, these investments will primarily be in more aggressive investments such as equities due to the millennials' stage of life. This will provide yet more demand for equities.
How about the effect of our baby boomers? What role will they play among the supply and demand for equities? A study done in 2009 by the Congressional Budget Office found that approximately two-thirds of baby boomers owned stocks. Of that two-thirds, only 10 percent controlled the two-thirds of those investments. This is similar to how the overall wealth in the United States is distributed amongst society, with a major gap so prevalent. The good news though, is that these wealthy boomers will most likely not have the need to sell their stocks, and have enough to live off their dividends. These portfolios will most likely be passed down to their heirs, and ultimately have no selling pressure on the market forces.
As time goes on, the economic data will slowly improve, resulting in a robust economy. A quick glance at the population numbers and the lagging unemployment numbers should give much hope to a bright future. This gives us good reason to be very optimistic about the future of our stock market's success. With all of this pent-up demand, and a slowly recovering economy, one should expect a mass influx of funds into equities as the millennials reach their 30s.
Disclosure: I am long LEN, TOL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.