Last month, I asked if the “Great Rotation” from bonds into equities was starting, then answered my own question with a “no” — or at least a “not yet.”
Click to Enlarge Based on the stock market’s performance over the past month, my skepticism might seem a little misplaced. That is, until you take a look at bond yields — which actually fell over the past month, even as the Dow Jones hit a new all-time high.
So, while investors obviously are warming up to stocks again, they haven’t exactly ended their love affair with bonds. Or at least not yet.
The Great Rotation will come … eventually. But it might still be a while. When the great bond bull market of the past 30 years finally does come to an end, it will be because the Fed stopped its quantitative easing or perhaps because of dumping by foreign holders. But it won’t be because regular investors decided to liquidate their bonds and jump with both feet into the stock markets.
Point being: When the bond bull does finally come to an end, it probably will be with a whimper and not with a bang.
And when it does, you’ll want to have your sights squarely on the “next big thing” — that next major macro trend that will drive our investment decisions for the next decade.
We already have a few contenders. There’s America’s domestic energy revolution, or the rise of the emerging-market consumer. But there’s another that has yet to really get started: the family formation of Generation Y, or the Echo Boomers.
I realize that not everyone finds demographics as fascinating as I do (most people find demographic data about as interesting as watching paint dry), so I’ll try to keep this as painless as possible.
The longest-held position in the SIL’s portfolio is toymaker Hasbro (NASDAQ:HAS), which I recommended almost three years ago.
My rationale was simple enough: There was a massive wave of births that crested in 2007, which happened to be the highest birth year in U.S. history. A baby born in 2007 is now a 5-year-old in 2013 and at the prime age for bugging mom and dad for toys.
In my mind, it would be hard not to make money in toys in the 2010s given the demographic backdrop, though Hasbro has really put my theory to the test. Hasbro’s market performance has been poor, but rival Mattel (NASDAQ:MAT) has more than picked up the slack. I recommended Mattel a little more than two years ago, and we’ve enjoyed 80% returns to date.
Hasbro and Mattel are both showing life of late, so I’m not in a huge hurry to sell them today. But my demographic argument has largely run its course. 2008-12 were all relatively small birth years, so the wave of incoming toy recipients is about to get a lot smaller.
And this brings me to my point. The “mini baby boom” that peaked in 2007 is a sneak preview of a much larger baby boom to come.
Remember, those babies born from the late 1990s to 2007 were mostly to Generation X mothers, with a few straggler Baby Boomer mothers. Generation X — my generation — is much smaller than the Baby Boomers that came before and Generation Y that came after.
If Generation X was able to give us a “mini baby boom” in the early-to-mid 2000s, just imagine what is coming from Generation Y.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.