1. As most readers already know, the financial markets have
been fueled by extremely accommodative monetary policy since
the Great Recession. However, we are now more than six-plus
years into the current bull market in U.S. stocks, marked by
gains of approximately 225 percent on the S&P 500
Index. In a historical context, this represents the fourth
most profitable bull market since 1930 (Bloomberg
Finance).
On top of this, we anticipate that the U.S. Federal
Reserve will begin to raise rates either at the end of
2015 or beginning of 2016, given continued strength in
U.S. economic data.
Internationally, we also know that the European Cen-
tral Bank’s policy is to implement stimulus in the form
of quantitative easing, purchasing €60 billion of gov-
ernment and corporate bonds each month until Sep-
tember 2016. What we do not know though is how the
stock market and economy are going to handle a transi-
tion from a liquidity driven market to a growth driven
market.
With these conditions, the current backdrop for cor-
porate America is relatively strong as most corporations have
remained lean after the recent crisis. We continue to witness
most corporations carrying high levels of cash. They have also
refinanced debt at low interest rates, lowering overall debt
expenses, while enjoying little to no wage pressures. All this has
resulted in U.S. corporations operating at near record high oper-
ating margins. Collectively, these conditions have helped propel
bottom line earnings growth and, in turn, the stock markets.
However, the issue companies currently have is where they
can find top line (sales) growth. Consumption since the financial
crisis has been tepid due to lost household net worth, saving
more to reduce debt and an unsteady labor market. With con-
sumption comprising nearly 70 percent of U.S. GDP and thus
being the largest contributor to GDP, a hesitant consumer is
clearly not optimal for companies’ sales prospects. These condi-
tions have resulted in a current price to sales ratio for
the S&P 500 Index that is in the highest quintile. The
only other time it was this high was at its peak in 1999
and 2000.
As a generally hesitant consumer weighs on current
sales prospects for companies, there are additional
conditions that weigh heavily on future sales growth
prospects to future workers known as millennials, or
individuals between the ages of 15-32.
First, those that graduate in 2015 from a four-year
collegiate program have approximately $35,000 in stu-
dent loan debt. That’s more than twice the cost of grad-
uates who attended in 2000 and could result in monthly
bills of close to $400 – the most indebted ever as costs
for college becomes less affordable (The Wall Street
Journal. “Congratulations, Class of 2015. You’re the
Most Indebted Ever [For Now] May 8).
Secondly, health care coverage for young adults has now dras-
tically changed since the adoption of the Affordable Care Act. In
the past, it was an individual’s responsibility and choice for
health coverage and costs. Today, there are plans of coverage that
must be selected to meet minimum essential coverage; otherwise
fees will be placed when filing tax returns.
Finally, the shift from most corporations offering its employees
defined benefit plans to defined contribution plans is another hit
to this generation’s bottom line budget. Defined benefit plans
THE DAILY RECORDWESTERN NEW YORK’S SOURCE FOR LAW, REAL ESTATE, FINANCE AND GENERAL INTELLIGENCE SINCE 1908
Wednesday, June 10, 2015
MoneyMANAGEMENT
Dynamic generational shift
influencing consumption
By TRAVIS
GALLTON
Daily Record
Columnist
Reprinted with permission of The Daily Record ©2015
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2. THE DAILY RECORDWESTERN NEW YORK’S SOURCE FOR LAW, REAL ESTATE, FINANCE AND GENERAL INTELLIGENCE SINCE 1908
Wednesday, June 10, 2015
Reprinted with permission of The Daily Record ©2015
were prevalent in the past, where the plan provided a fixed
amount of retirement money for individuals, and the employer
made most of the contributions to funding.
However, as of the end of 2013, a Towers Watson study found
that only 24 percent of Fortune 500 companies offered a defined
benefit plan to new employees, compared to 15 years earlier,
where 60 percent of companies offered defined benefit plans
(http://bit.ly/1HnkBFv). Today, most companies have defined
contribution plans where individuals are responsible for making
their own contributions toward meeting their retirement savings
goals.
What does this all mean for the economy and stock markets?
The future generation primed to drive our economy has less
money to spend after accounting for the previously mentioned
expenditures. Moreover, millennials have seen the negative
impacts of the 2008 Great Recession and, as a result, there have
been signs of a generational change where they now try to avoid
debt, save and buy items with cash.
The bottom line of such a change in mentality would be much
lower trending economic growth than has been witnessed in past
business cycles.
Travis M. Gallton, CFA, is a senior equity portfolio manager for
Karpus Investment Management, a local, independent, registered
investment advisor managing assets for individuals, corporations,
nonprofits and trustees. Offices are located at 183 Sully’s Trail,
Pittsford, NY 14534; or call (585) 586-4680.
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