Millennials have taken punch after punch from high interest rates...

Like most Americans, the younger generation had extra money saved up during the pandemic.

They received the same stimulus checks as everyone else. And some even had the added bonus of delayed student-loan payments, saving them an extra couple hundred bucks each month.

As we saw, with most everything shut down, there wasn't much to spend on... So, they saved and saved.

Over the past few years, though, millennials used those extra savings for extra expenses. Once the economy opened back up after the pandemic, they splurged. They went out to eat, spent money on new clothes, bought big-ticket items, and were part of the huge "revenge travel" trend.

Now, what savings millennials had left are starting to run out. The debt they took on is adding up due to high interest rates. Their credit- and debit-card delinquencies are on the rise. And many are facing the resumption of student-loan payments.

This generation is finally being forced to rein in their spending... which, in turn, is hurting certain sectors of the economy that are typically supported by millennials.

On the other hand, high interest rates have actually been a boon for one generation... Baby Boomers.

As we'll discuss, Baby Boomers have had plenty of time to build up their asset bases. And thanks to high interest rates, they have a healthy amount of savings, too. In turn, the best way to play today's market is by investing in stocks that cater to the older generation...

Millennials are getting squeezed, while Baby Boomers are raking in cash...

According to data from Bank of America, millennials spend a lot more on things like housing, transportation, and retirement compared with Baby Boomers.

Baby Boomers more frequently own assets like houses and cars outright, meaning they're not nearly as much of an expense. In fact, nearly twice as many Baby Boomers own their homes compared with millennials. That means they don't have to worry about how interest rates might change mortgage or rent costs.

On top of that, as Baby Boomers get to the end of their careers and retire, they don't have to worry about putting money into retirement or pension plans. They've had a full career to save away... and now they have money to spend or invest.

Take a look...

This has led to a huge split in the way millennials and Baby Boomers view high interest rates...

On the one hand, millennials largely depend on debt to pay for homes, cars, and even college tuition. Higher interest rates make those expenditures more expensive and harder to pay off.

Already, there has been a rise in credit- and debit-card delinquencies among millennials. And the longer interest rates stay elevated, the more the younger generation is going to have to tighten its purse strings.

As we said earlier, that'll hurt the industries that cater to them... like retail. Millennials spend more on apparel than Baby Boomers do, so it's likely retail will feel some pain.

On the other hand, Baby Boomers are sitting on more assets and savings and have much less debt. And their savings in particular have gotten a major boost from higher interest rates... as savings accounts are yielding more today than they have in two decades.

As a result, Baby Boomers haven't had to hamper their spending. They now account for the bulk of U.S. consumption. 

And the sectors they spend the most in stand to benefit...

Sectors like health care, entertainment, and travel – where the older demographic tends to spend more money – are likely to do well...

In fact, according to Bank of America, when it comes to discretionary spending, travel ranks highest on the list of priorities for Baby Boomers. Cruise lines especially see a large crowd of Baby Boomers, who make up roughly 40% of their guests.

Above all else, though, health care might be the biggest and most important spending category for the older generation.

Baby Boomers spend significantly more on health care than millennials do. And recession or not, that spending isn't flexible... The older you get, the more you need to spend on taking care of your health.

Focus on what Boomers are buying...

Eventually, "millennial stocks" will bring fantastic investment opportunities. As the largest generation, it has the numbers to drive spending in certain sectors of the economy.

However, as we've covered, we're unlikely to see a pickup in millennial spending today... Interest rates are weighing too heavily on millennials' pockets and their mountains of debt.

We're in a golden era for Baby Boomers. They have more cash to spare, and their spending could rise even further with the central bank expected to keep rates elevated.

"Boomer stocks" – like those in health care, travel, and entertainment – will likely do well as a result.

Regards,

Joel Litman
November 7, 2023

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