By The Sizemore Letter<\/u><\/p>\n
Sex.<\/p>\n
There, I got your attention.<\/p>\n
I find that when I start an article with the word \u201cdemographics,\u201d eyes glaze over.\u00a0 But when I start the same article with \u201csex,\u201d the reader snaps to attention.\u00a0 Funny how that works.<\/p>\n
Yet in the context of the economy and the financial markets, they are the same thing.\u00a0 Consumer spending is roughly 70% of the economy according to the official GDP numbers.\u00a0 But the reality is that it is responsible for 100% of our economic activity.\u00a0 \u00a0Adam Smith commented in The Wealth of Nations<\/i> <\/a>that \u201cConsumption is the sole end and purpose of all production,\u201d<\/strong> and he was spot on.\u00a0 Everything\u2014investment in productive capacity, business-to-business spending, government spending, etc.\u2014eventually flows down to consumer spending.\u00a0 And the biggest factors that influence our spending\u00a0 habits are family formation and stage of life.<\/p>\n Think of it like this.\u00a0 A young man spends his money attracting a mate\u2026a man in early middle age spends his money raising the resulting offspring\u2026a man in late middle age saves his money in preparation for retirement\u2026and an older man doesn\u2019t spend much on anything.<\/p>\n Oversimplified?\u00a0 Absolutely.\u00a0 But you get the point I\u2019m making.\u00a0 Our age is a major factor in our spending habits as individual families.<\/p>\n Why does this matter?\u00a0 Because if it is true of individual families, it is also true of the country as a whole.\u00a0 An economy dominated by young families will see high rates of consumer spending and debt growth, whereas an economy dominated by those in late middle age will see slower growth and higher rates of debt repayment.<\/p>\n This is where we are today.\u00a0 America\u2019s Baby Boomers are now on the downward slope of the consumer life cycle.\u00a0 Since the 1960s, they\u2019ve provided economic tailwinds; but those tailwinds have now turned into some pretty harsh headwinds.<\/p>\n I bring all of this up because I saw a guest piece in John Mauldin\u2019s e-letter co-written by Rob Arnott\u2014one of the most respected minds in finance\u2014that reaches the same conclusions (see Mind the (Expectations) Gap: Demographic Trends and GDP<\/a><\/strong>).<\/p>\n Arnott focuses more on workforce growth and dependency ratios than on consumer spending patterns (which I consider a case of the tail wagging the dog), but this is a case where all roads lead to Rome. We enjoyed higher-than-normal growth rates in the decades following 1950, and we will now suffer through lower than average growth rates in the decade ahead.<\/p>\n Importantly, we are<\/i> going to experience growth; Arnott is not a \u201cdoom and gloomer\u201d forecasting a multi-decade depression. But it\u2019s going to be a much different environment than what we are used to.<\/p>\n Using Japan as an example, Arnott writes:<\/p>\n It is human nature to consider our personal experience to have been \u201cnormal,\u201d so we evaluate subsequent events in comparison with this self-referential \u201cnorm.\u201d If the people of Japan consider the former tailwind of 2\u20133% to be \u201cnormal,\u201d then a future 2% headwind will feel like a ponderous 4\u20135% drag, relative to expectations. On average, the countries in this analysis enjoyed benign demographic profiles that boosted GDP growth by around 1% per year during much of the past six decades. (Read full article here<\/a>).<\/p>\n<\/blockquote>\n What are we to do with this information?\u00a0 In truth, there is no much you can \u201cdo\u201d about demographics.\u00a0 They are the future that has already been written.\u00a0 But you can invest accordingly.\u00a0 Understand that top-line sales growth will probably not be as robust as in years past.\u00a0 Earnings per share growth will come disproportionately from share buybacks\u2014as has been the case for the past several years.<\/p>\n Importantly, you should also invest for income.\u00a0 Focus on companies with stable businesses that have a long history of raising their dividends.\u00a0 And, where possible, look for growth in companies that target emerging market consumers and young American families.\u00a0 The Millennials are starting to enter the family formation stage, and this generation will be the primary engine of domestic growth for the next 30 years.<\/p>\n This post first appeared on InvestorPlace<\/a>.<\/p>\n SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n\n