The market’s cultural headwaters

How Baby Boomers and Millennials shaped, and are shaped by, their economies. 

The generational divide is a part of the human condition – and the investor condition. It’s not just that one group has more experience than the other, or that one is more eager to make its own way, but that both groups can learn totally different lessons from the same event.

We can look at the Great Recession as a fork in the road, leading to some interesting generational differences among investors.

Baby Boomers, whose generation began in 1946, experienced the 2008-2009 crash in their mid-40s to mid-60s; those ages when retirement discussions start to get serious. They saw the value of the US stock market, in which they were heavily invested, drop by 40%. Many older members of their cohort delayed retirement until the dust settled and it took roughly six years for the S&P 500 to reach pre-crash values.

The Millennial generation – the oldest of whom were born in 1981 – were just arriving to the job market as the Great Recession caused the unemployment rate to spike to 10%. Many were forced to delay the hallmarks of American adulthood – marriage, families and homeownership – and then were not heavily invested enough to enjoy the market bounce that followed.

Both generations then witnessed the longest sustained bull market in history. Many Baby Boomers were able to make up for lost time. Millennials have remained a step behind. The lessons both cohorts brought out of that same moment couldn’t be more different.

How Baby Boomers are shaping the market

With the US national debt approaching $40 trillion, how long the country can keep relying on borrowed money is a topic of intense debate. Presently, the federal government’s third largest expense is interest on debt, about $933 billion a year of the $6.6 trillion budget, after Social Security and Medicare. And with today’s elevated interest rates, new debt costs substantially more than that accrued during the “easy money” years after the real estate crash.

A portion of that difference may be attributed to elevated interest rates set by the Federal Reserve to curb post-pandemic inflation, but US Treasurys follow the law of supply and demand the same as every other financial asset. Without demand from buyers, it doesn’t matter what the baseline interest rate is, Treasury yields will rise. That means the cost of government debt will increase.

A rapid increase in Treasury yields is the scenario that gives government accountants night sweats. Luckily, they have a friend (or maybe an enabler) in the Baby Boomer generation.

The wealthiest cohort in history, Baby Boomers have an estimated net worth of $88 trillion. And having weathered a number of economic crises, Baby Boomers have gravitated toward lower-risk, income-generating investments, with their average portfolio 62% allocated to fixed-income investments: federal, municipal and private debt.

Put in other terms, Baby Boomers have roughly $55 trillion invested in debt – a sum larger than the entire US bond market combined, excluding the $11 trillion mortgage-backed securities market. This sum and the demand for bonds it enables is expected to keep Treasury yields down, even as the country continues to stack on debt.

What happens next? Eventually, Baby Boomers will divest from the market, their demand for Treasurys tapering off as they spend down their retirement savings and contribute to what some financial advisors call “the greatest wealth transfer” between generations. The hope, then, is that the debt problem will be resolved before the cost of borrowing becomes cataclysmic.

How Millennials are shaping the market

The largest generation of Americans in history has entered middle age. Suffering from the weak labor market at the dawn of their careers and arriving largely late to the post-recession recovery, Millennial investors are generally understood by financial advisors as more adventurous with risk than their predecessors and more willing to embrace sophisticated offerings. Though not “digital natives,” per se, they came of age amid the digital revolution and have led cultural shifts regarding app-based trading, social “meme” investing, crypto currencies and perhaps above all, equity investing almost to the total exclusion of bonds.

To explain some of this, you only need to look at the environment that nurtured them. Millennial investors have never seen a sustained bear market. Pensions are effectively extinct, faith in the long-term viability of Social Security is low and 401(k) plan participation is high – there is a strong sense that they will need the market to create their retirements. And Silicon Valley for two decades seemed to mint a steady stream of overnight tech centi-millionaires fueled by venture capital in a culture of swinging big, failing fast and swinging again. Millennials were paying attention – they’ve been steeped in a FOMO (fear of missing out) market. Related to that, typical Millennial investors have more interest in investments once considered rarefied, including alternative assets and private markets.

So far, the market has done little to curb Millennials’ risk-ready impulses. The COVID crash was followed by an almost immediate rebound and the US economy continued to run hot despite the post-pandemic inflation spike and increased interest rates. Then came AI and a wave of investment paving over any structural weakness in the market.

A major market disruption could change Millennials’ habits, but there are structural supports that could keep it up. For one, there are fewer publicly traded companies today than 30 years ago – by the law of supply and demand, this will push stock prices higher. Secondly, today’s growth companies are closely integrated with the economy at large. The dotcom era of the late 1990s was led by exciting, disruptive insurgents. The leading companies of the AI era are essentially the 21st century business establishment.

Millennials are also seen to be the primary benefactor of the Baby Boomer wealth transfer, which could further fuel the equity market or may play a role in spurring Millennials’ investing confidence.

Generational experiences have created distinct investment philosophies. Baby Boomers have leaned toward stability, while Millennials have embraced risk and innovation. As wealth shifts and influence changes hands, these forces will continue to shape the market’s direction and the culture that drives it.

Past performance is not indicative of future results. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. There is no assurance any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss. Alternative and private market investments are not suitable for all investors. The companies engaged in the technology industry are subject to fierce competition and their products and services may be subject to rapid obsolescence. The value of fixed income securities fluctuates, and investors may receive more or less than their original investment if sold prior to maturity.;