Buy boomers, sell millennials is Bank of America’s way to play this market
With high interest rates fattening their savings accounts, baby boomers are flush. Young Americans are struggling with debt, skyrocketing rents, and mortgage rates that make home ownership even more out of reach.
This is driving Bank of America Corp.’s new trade recommendation, which aims to capitalize on the growing generational wealth gap: Buy old people’s stocks. Avoid companies whose fortunes are based on cash-strapped millennials.
That means American Express and cruise lines are on board. Revolve Group Inc., a self-described “next-generation fashion retailer” for twenty-somethings, is out.
“Millennials are particularly affected by the hiking cycle.” “Boomers, not so much,” said Ohsung Kwon, a quantitative strategist at BofA and a millennial himself, in an interview. “We’re starting to see a big diversion between the two.”
That fault line is growing beneath an economy that has remained surprisingly strong on the surface, owing largely to a steady consumer spending surge since the pandemic lockdowns ended.
True, the Federal Reserve’s aggressive interest-rate hikes have slowed the economy in some areas. However, they have effectively provided a steady supply of stimulus checks to older Americans, who have gone from receiving virtually no interest on their savings to receiving the highest interest payouts in two decades.
Victories and defeats
According to BofA, this is likely to benefit sectors such as health care and entertainment, where older people spend a lot of money. Home improvement stocks may also benefit as boomers live longer than previous generations and become hesitant to sell homes with low mortgage rates.
On the other hand, clothing retailers, a category heavily skewed toward the young, are facing significant headwinds.
With the Fed planning to keep interest rates high for the foreseeable future and the federal deficit ballooning, bond yields appear set to rise further. This, in turn, raises the interest rate paid by the government on Treasuries, which goes directly into the pockets of investors.
As a result, according to BofA data, baby boomers and those who came before them now account for the lion’s share of US consumption. Meanwhile, members of the cohort born between the early 1980s and the late 1990s have reduced their spending and seen credit and debit card delinquencies rise.
“Prior to the pandemic, there was empirical evidence that boomers outperformed millennials in terms of investments, retirement accounts, and home ownership,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management. “And, as a result of higher inflation and higher interest rates since the pandemic, that divide has widened dramatically.” The gap is simply enormous.”
Boomers are on vacation
According to BofA, cruise lines have the most exposure to boomers, who account for roughly 40% of their trip attendees. According to AARP data, travel was the top priority for discretionary spending among adults over the age of 50, according to BofA. And that industry has benefited greatly from the post-pandemic travel boom: the S&P 500 hotels, resorts, and cruise lines index is up nearly 28% this year, despite a recent drop.
The BofA report includes only a few specific stock recommendations. However, because older adults are more likely to use American Express credit cards, the company is singled out as a beneficiary of its “boomer’s boom” thesis.
On the millennial front, BofA noted an ongoing slowdown in clothing spending, which they attribute in part to a wealth and consumption disparity between the two age groups. Analysts see a particular risk for e-commerce retailer Revolve, which charges higher prices than its peers and is popular with Gen Z and millennial customers.
However, given the rapidly advancing ages of the boomers, some investors are skeptical of the industry’s long-term viability. Furthermore, all of that wealth will be inherited – and much of it spent – by millennials.
“I think you’re skating to where the puck is rather than where it’s going if you focus investments on boomer preferences rather than millennial preferences,” said Douglas Boneparth, president of Bone Fide Wealth. “If there is significant wealth being transferred to millennials or younger, wouldn’t you want to understand the investment preferences and consumer habits of that generation as far as investing in the long term?”
For the time being, BofA argued that boomer spending and asset ownership are sufficient to sustain consumption. The bank has maintained a positive outlook on US consumer spending and stocks in general, with its economists abandoning a previous prediction that the US would enter a recession.
“Everyone talks about the access savings that are dwindling, but they are double pre-Covid levels, and that’s only part of the story,” BofA’s Kwon said. “You gotta look at the whole picture, the whole balance sheet — and the balance sheet for the consumer still looks phenomenal.”
