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Generational Trends

Transfer of Wealth and its Influence on Financial Markets


The accumulation of wealth and the subsequent transfer of wealth from one generation to the next can dramatically impact consumer spending, housing markets, savings, investments, and retirement planning. For instance, when a generation enters its wealth accumulation phase (typically starting at 35 years old), it tends to exert an undue influence on the economy, and hence, the financial markets. Depending on the degree of influence, it can have a profound impact on structural bull/bear trends in stocks and generational bull/bear trends. Generational shifts have occurred due to the transfer of wealth from one generation to the next as they have influenced the economy and hence the financial markets. Most recently, the Baby Boomers Generation (those born between 1946 and 1964) single-handedly spurred on one of the greatest bull markets in the past century, namely the 1982-2000 structural bull trend. It is reasonable to expect the Millennials or Generation Y (born between 1980 and 1994) will now play an increasing role in the current May 2013 structural bull trend.


Structural Trends (8 to 20 years in duration)


The Millennials are tech-savvy as they grew up with computers and are avid users of the internet and social media. They have also experienced the Great Recession and witnessed the 9/11 terrorist attack. In the past couple of years, the oldest of Generation Y turned 40. Because of their large size of over 95 million strong, they can directly influence the U.S. economy and alter the direction of the US financial markets. Although the bears believe the current bull run is nearing an end, if the Millennials continue with their wealth accumulation mode, then the current bull (now 10 years old) can sustain until at least 2033 when the youngest of Gen Y turns 39, and the oldest turns 53.


Past 100-years


In the past 100 years, there have been three generational trend shifts in U.S. stocks (SPX Index). The generational lows occurred along the lower trend line (red and burgundy dash lines at 598 and 1,108). The short-term black dash line (1,410) offers additional longer-term support. The internal blue dash line (2,693) represents the equilibrium level. The upper green dash trend line (now at 5,772) coincides with two previous generational highs (1929 at 31.30 and 2000 at 1,553.11). Interestingly, SPX also failed at 4,818.62 on January 2022, near the top of the green dash trend line. It is uncanny that the two extremely bullish market periods coincided with speculative bull rallies (i.e., 1921-1929 roaring 20s and 1982-2000 tech/telecom bull). Connecting the tops of the two prior structural bulls (1929 - 31.30 and 2000 - 1,553.11) places SPX at a high of 5772. Will SPX achieve this structural high in the years ahead?


Generational Trends


Since 1928, it is uncanny the SPX Index has experienced generational lows and highs spanning almost every 35-42 years or so. Generational lows occurred during 1932 (4.40), 1974 (60.96), and 2009 (666.79). It is also interesting to note that generational lows and highs have coincided closely with periods of the enormous amount of transfer of wealth or subdued transfer of wealth from one generation to the next. For instance, the generational shift from the Silent Generation (born between 1925 and 1945) to the Baby Boomers (born between 1946 and 1964) ignited the 1982-2000 structural bull. If another generational low developed in 2009 (666.79), then does this imply the next generational low may not occur until many decades from now, possibly during 2041-2044?


Factors that Shape the Generational Trend Framework


It often takes decades for the transfer of wealth to have a material impact on financial assets such as savings, home purchases, IRA funding, 401K retirement plans, and stock/bond investment positions. It is important to note that many factors shape the generational trend framework. However, three specific factors are responsible for the emergence of a new generational trend shift. (1) Socio-economic conditions are often necessary to trigger the generational trend shift. Significant shifts in values, culture, and issues influence economic conditions and cycles. An example is the Great Depression. The risk-aversion period influenced the psyches of the Lost Generation (born from 1890 to 1915). (2) Technology/Industrial Revolutions/Shifts can influence social/business activities, behaviors, and the economy. For instance, the emergence of the personal computer during the late 1970s to the early 1980s spurred investments, research developments, and innovation. (3) War and geopolitical uncertainties can also impact generational shifts. World War I and II and the Vietnam War are three major conflicts that shaped the mindsets and values of several generations.


Extrapolation of Generational Trends


By extrapolating the generational SPX trends, such as the internal trend line (blue dash line) that dates to 1929, it may be possible to forecast the price of the SPX in the distant future. Based on the current pace of the wealth transfer from Baby Boomers to the Millennials, this would imply an SPX can trend to 16,670 before 2035. It is important to point out that the internal trend line (blue dash line at 2,693) and the Mar 2023 low (2,191.86) are critical supports. A breakdown will ignite a bear market decline. Violation of the blue dash internal trend line warns of the start of a structural bear market trend, leading to a retest of the black dash line (1,410) and below this to the bottom of its generational lows trend lines (burgundy dash line at 1,108 and the red dash line at 598).


Generations and traits (1890 to present)


Lost Generation: Born during 1890-1915


This generation came of age during WW I. “Lost" refers to the great confusion and aimlessness among the war's survivors in the years following post-war. The term is also a reference to a group of artists, American Ex-pat writers, living in Paris Post WW I (i.e., Ernest Hemingway). At age 35 years, this generation suffered through the Great Depression and the structural bear market of 1929-1949, impacting their spending, saving, and investing habits.


Greatest Generation: Born during 1910-1924


Known as the G.I. Joe generation and the WW II generation. Parents of Baby Boomers lived through and experienced the hardships of the Great Depression. They later fought in WW II. After returning home from war, they worked in the industries that contributed to the winning of WW II.


Silent Generation: Born during 1925-1945


This generation grew up during the Great Depression. And as such, they had low expectations and suffered hardships. They were known as the Silent Generation. Value authority. Favor top-down management approach and diligent/hard worker. As a group, they were not loud and did not protest since there were no major World Wars during this period. When they turned 35 years old, they endured the stagflation period of the 1966-1982 secular trading range market.


Baby Boomers: Born during 1946-1964


Currently, they are 76 million strong. This generation grew up during a time of great prosperity and the absence of any World Wars. They are workaholics and can expect some degree of deference to their opinions. When they reach 35 years of age, this is the start of their wealth-creation period. They married, bought their first house, had kids, and began to invest in their children's education (529s) and fund their retirements (IRAs, 401Ks, and pension plans). Their collective spending and investing prowess led to the 1982-2000 structural bull.


Generation X: Born during 1965-1979


There are around 82 million in the US. Known as the Bust Generation because their birth rate was much less than the preceding Baby Boomers. They grew up with one of the highest levels of education. Comfortable with authority. But will only work as hard as is needed but concerned about job security. They value the importance of work-life balance and individualism. Experienced Oil Embargo, soaring inflation, fall of the Berlin Wall, end of Gold War, first Gulf War, and NAFTA. At 35 years of age suffered through the volatile structural trading range environment of 2000-2013. NAFTA led to the loss of millions of American jobs.


Millennials/Gen Y: Born during 1980-1994


With a total population of 95 million, this generation is tech-savvy. Gen Y grew up with computers, the internet, and social media. Respect must be earned. Goal and achievement-driven. They endured the Great Recession and suffered the 9/11 terrorist attack. The oldest of Millennials turned 35 years old in 2015. Because of their size, they will begin to exert influence on the financial markets. By 2029, the youngest of Gen Y will be 35 years old or the start of their wealth accumulation phase.


IGen/Zoomers/Gen Z: Born during 1995-2009


One of the most tolerant of all generations. More accepting and open-minded, regarding acceptance of different cultures, sexual orientations, and races. Grew-up highly supervised and more protected than prior generations. Avid users of smartphones, social media, and gaming. Fast decision makers and highly connected. They experienced numerous global and geopolitical crises and the Arab Spring. Gen Z is generally less optimistic and possibly less naive than the previous generation (Millennials). As a result, they are more cautious about life and less willing to take risks. They value freedom and working from home but distrust political systems. Gen Z may be, if not more influential, than the Millennials when they come of age.


Generation Alpha: Born during 2010-2024


Will not only be a heavy user of Technology but will be immersed in Technology. They will have increased digital literacy and the gamification of learning. The use of technology will lead to shorter attention spans and less social interaction with peers. Higher than any other generation living without both of their biological parents. They will have a higher share of children with foreign-born parents and children who are also foreign-born. They will move frequently, change careers more often, and likely reside in urban areas.


Technical Analysis of Generational Trends from the 1920s to the Present


Generational trends in U.S. stocks (i.e., SPX) tend to endure far longer than structural trends (8 to 20 years). Typically, these generational trends last from 35 to 42 years. For instance, after achieving a generational low of 4.40 in 1932, it would take another 42 years before the next generational low of 60.96 in 1974. From the 1974 bottom, it would take another 35 years before the next generation low at 666.79 in 2009. If the generational lows trend continues, the next generational low can occur between 2041 and 2044 between 7,295 (x10.94) and 9,235 (x13.85). On the upside, the length of the generational highs has been 36 years and 26 years, respectively. For example, from the great depression stock market bottom of 4.40 (1932), it would take 36 years for SPX to achieve a peak at 109.37 (1968). SPX gained 104.97 points and rallied x24.86 from its 1932 generational low. Again, from the 1974 generational low (60.96), SPX gained 1,492.15 points in 26 years, peaking at 1,553.11 (2000).


It appears that things happen much faster today than in the past. The proliferation of computerized/electronic trading and the availability and instantaneous flow of information and data has accelerated the trend. This is especially true with the duration of the generational rallies, as they have shortened dramatically from 36 years to 26 years. Interestingly, the magnitude of the rallies remains almost the same at x24.86 and x24.48. If 2009 (666.79) was the start of the most recent generational rally, then based on the acceleration of the trend, this would imply that in less than 26 years, SPX can achieve a generational high of 16,670 before 2035.


Source: Chart courtesy of StockCharts.com

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