Baby Boomers are the largest US demographic and are in their peak earning years.
This slice of the American population earns and controls a huge and increasing amount of earned income and assets.
As they reassess their progress towards a secure retirement, they now have to save more. They need to invest more. As they age and become more conservative, and in light of the recent housing and stock market drops, they are investing in more conservative areas like bonds, which does little to support real, sustainable economic growth. Therefore a large part of the population that had been driving economic expansion is now in retreat and will be a good deal more subdued for a while to come.
But it is important to remember that these same baby boomers will not reach their retirement goals through investment in bonds yielding 2.5%. At some point, boomers must return to the stock market in order to achieve their retirement, inheritance and philanthropic goals.
On one level, this is a normal part of an economic cycle: contraction after expansion. The near-term will remain volatile and frustrating, but I believe the long-term will be positive. A year ago we were watching the rate of decline slow. This year we are watching a fragile, positive economic renaissance. We are moving in the right direction but the depth of this decline created an intimidating long road to recovery.
The additional headwind of eviscerated retirement savings will be with us for many years, and, I believe, will mandate longer working careers until most are well past the age of 70. But we will adjust to the new realities.
In the more intermediate term, we remain defensive.
We believe it is likely that housing prices have further to fall, and we believe the consumer is engaging in a more permanent shift in her spending/saving patterns. The baby boomer is ill-prepared for retirement and simply cannot continue with her/his reckless spending. Debt will continue to be paid down, spending growth will be modest, and economic activity will be subdued. In this type of environment, we believe quality, defensive blue chips will outperform.
Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.