Ever since they reached adulthood, millennials have gotten a lot of blame for a lot of things. Recently, through the dreary days of the pandemic lockdown, they’ve taken the heat for causing wild swings in the stock market as they day-trade their fiscal stimulus checks.
In a Thursday note, a boomer, DataTrek’s Nicholas Colas, spoke up for the young’uns. “In reality, they are no ‘dumber’ than baby boomers during the 1980s – 2007 bull markets,” he writes. Market structure was different, the technology is night and day, and the financial products of choice back then are dinosaurs now. But, in Colas’ words, “every generation does some dumb stuff, but then learns and comes out OK”.
Colas tracked flows into mutual funds, which exploded from 1984 to 1987, to make the point that “Boomers’ imaginations were just as captured by the 1980s bull market as millennials are by the rally over the last year.”
While mutual fund manager Vanguard had been offering low-cost index funds since the late 1970s, most money was flowing into actively-managed funds, Colas wrote.
“We wanted real people managing our money. Millennials are doing the same thing right now except they are the ‘real people’ making investment decisions. And, because of virtually free (excluding payment for order flow charges), they are paying far lower fees than boomers did at the start of their investing career while still performing well thus far.”
There’s been a lot of chatter about how a down market –– or the return to a post-COVID normalcy –– will kill millennial interest in investing, potentially depressing asset prices they’ve goosed higher. But “the dot com crash did not signal the end of boomers’ mutual fund inflows. Yes, there was one crazy year for mutual fund inflows – 2000, of course – when equity mutual funds saw $315 billion of net new purchases,” Colas writes. “In the 4 years from 2003 – 2006 equity mutual fund inflows averaged $145 billion.”
Notably, at the lows of that last market cycle, 2002, boomers sat out. In contrast, millennials piled into the market during the spring of 2020 when the stock market
appeared to have bottomed.
A lot has been written about the introduction of technology into financial trading. The ability to see a bid-ask spread and execute trades – even in fractions of shares – instantaneously has clearly helped democratize the process for ordinary investors of all ages.
Colas dismisses the idea that technological innovations has a big impact on markets by showing a chart of the CBOE Volatility Index
“Every economic expansion since then has seen the VIX fall to 10,” he writes. “Both the Financial and Pandemic Crises saw the VIX go to 50+ for a month, totally understandable given the events of the times. But the all-time low in the VIX was in 2017, well after the mass adoption of smartphones and online trading.”
It is worth pointing out, though, that there are risks from technological and product innovations, that traditional Wall Street risk gauges may not register. Those advances –– trading from the palm of the hand, using leverage, accessing exotic products, following questionable social-media suggestions –– might allow millennials to get themselves into far more trouble than comparably-aged investors of the 1980s and 1990s could.
“Millennials will follow in boomers’ footsteps now that they’ve had their introduction to stock market investing,” Colas concludes. “They’ll pay some ‘tuition’ in the form of dumb stock ideas just like boomers paid +10 percent first year fund fees and 2-3 points thereafter. They may even grow squirrely when markets falter, a la mutual fund flows in 2000 – 2002. But then they’ll come back, and perhaps they will avoid making the boomer error of selling the next big bull market.”
Let’s hope that’s how it works out for most individuals having their first introduction to the stock market now.