(Bloomberg) — This new flock of young adults known as the millennial generation acts in ways that are very mysterious to the rest of us who came of age in the last millennium.
For example, why on Earth do they refuse to play golf? And why do they dress like the Little Mermaid and dance in slow motion at concerts that feature no actual musicians? Most importantly: are they secretly filming us with their smartphones so they can mock us later on social networks we haven’t yet heard of?
As intriguing as this generation is, you may be wasting your time trying to mine their mercurial modus operandi for investment ideas. Instead, the baby boomers are still the ones really driving the bus in the stock market, according to Bank of America Corp. strategists led by Savita Subramanian.
Consider the leadership of the stock market this year: health care shares are up more than 16 percent for the biggest advance among 10 groups in the Standard & Poor’s 500 Index. Companies that rely on discretionary consumer spending are barely up 1 percent, the worst performance.
This trend is unlikely to abate, according to Subramanian and colleagues.
“People tend to spend less as they get older, and spending habits shift from discretionary items like cars and clothing, as well as education and child care, to drugs and health care,” they wrote.
Health care stocks make up almost 14 percent of the S&P 500, the third-biggest group and ahead of consumer-discretionary companies at less than 12 percent. Twenty years ago, they made up 9 percent of the index and ranked No. 6 while consumer discretionary companies accounted for 15 percent as the biggest group, according to data compiled by Bloomberg.
Even though the performance of health care stocks and their weighting in portfolios show that fund managers are hip to the trend, Subramanian wrote that the industry’s valuation remains attractive and pharmaceutical stocks should be bought because of both increased demand for drugs and strong dividends. Pharmaceutical, biotechnology and life sciences companies in the S&P 500 trade for about 17.8 times estimated earnings over the next 12 months and are projected to increase dividends by 6.2 percent in the next three years.
On the other hand, consumer-discretionary stocks face both short-term and long-term challenges, according to Subramanian. First, they tend to not do well in periods of rising interest rates like the one everyone is bracing for next year. Over the long term, the aging baby boomers will not be spending as much on consumer goods, except for some select areas such as cruise ships, anti-aging cosmetics, pharmacies and home-improvement stores, according to the report.
The net result should be positive for the U.S. stock market, according to Subramanian. As baby boomers face longer lifespans to fund, individuals and pensions may turn more of their investment allocation to the S&P 500 because it “offers an optimal combination of capital appreciation, competitive income and inflation protection.”
That’s a good thing, since many of them may need to fix up the basement for their millennial kids and grandkids.