David Leonhardt recently wrote an article in the New York Times titled “Fleecing of the Millennials.” He argued that: “For Americans under the age of 40, the 21st century has resembled one long recession.” The article explained that: “People between the ages of 25 and 34 were earning slightly less in 2017 than people in that same age group had been in 2000.” And “since the century’s start, median net worth has plummeted for every age group under 55.” So “the generational gap in both income and wealth is growing.”
Leonhardt did not refer to the heavy promotion of the Buy-and-Hold investment strategy as a cause of the problem. But Yale Economics Professor Robert Shiller pointed to a connection in his book Irrational Exuberance. If most investors practiced price discipline when buying stocks (increased their stock allocations when valuations dropped to low levels and lowered it when valuations rose to high levels), prices would never get too out of hand because distaste for the low returns associated with stocks purchased at high prices would stop irrational exuberance from developing much steam. But the price indifference encouraged by Buy-and-Holders has permitted valuations to go to higher levels than ever before seen in history in recent years and for those price levels to remain in place for longer than they ever have before.
Shiller wrote: “The loss [from a price crash] will not be borne equally. Some who rode the market up to new prosperity will have lightened up on their stock holdings and will keep their gains; others will have recently entered the market and will take only the losses. Thus, a substantial fall in the market would leave some people really poor while leaving others very rich.”
He continued: “[Some] may find that their careers our ambitions are thwarted. With fewer economic resources at their disposal, the need to maintain an income level and fulfilling everyday obligations will consume time and energy they had hoped to devote to individual fulfillment…. The ‘amazing power’ of compound returns that has become such an article of faith among so many people does not apply if the returns are not there in the first place.”
The annualized stock return from January 1982 through January 2000, when Baby Boomers were in high wealth-accumulation years,was 14.7 percent real. The compounding returns that they earned on their stock portfolios during those years provided them a big edge in their efforts to accumulate enough assets in a limited amount of time to finance a nice middle-class retirement.
The millennials have not fared nearly as well. The annualized return from January 2000 through today has been 3.3 percent real. That’s less than one-fourth of the return earned by the Baby Boomers! That’s a lot less compounding!
And it’s only going to get worse for the millennials if stocks continue to perform in the future at least somewhat as they always have in the past. A return to fair-value stock prices would translate into a price crash of nearly 50 percent. A drop to a CAPE value of 8, which is the CAPE value that we have seen at the end of every earlier bull/bear cycle, would translate into a price crash of something in the neighborhood of 70 percent. A price crash of 50 percent or of 70 percent is going to cut into that 3.3 percent return in a dramatic way.
The efforts of millennials to take advantage of the great compounding power of the U.S. stock market has been thwarted by the insanely high CAPE values that have applied for many years now. We didn’t plan for this to happen, of course. It is not as if the Baby Boomers got together in a room and hatched a plan to have stock prices soar during their big wealth accumulation years and then to have them stall during the wealth accumulation years of the millennials. But we cannot say that this result was entirely unpredictable, Shiller published his “revolutionary” (his word) research findings that valuations affect long-term returns in 1981. We didn’t know what we were doing when we pushed stock prices so high in late 1990s. But we could have known. We didn’t know because we didn’t want to know.
Shiller changed our understanding of what brings price rises and price falls. It is not some force out of our control. We decide the winner and losers by permitting irrational exuberance to get out of control or by reining it in by warning investors of how much the value proposition of stocks diminishes when prices soar too high. It follows that we have a responsibility to see that price gains not get too out of control. People get hurt when they do. Attaining a higher level of stock price stability should be a pressing public policy concern.
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