Why Millennials Aren't Ready for the Next Financial Crisis

As the bull market celebrates its 10th anniversary in March, marking the economy’s longest expansion in decades, one generation of American investors may be particularly vulnerable. Millennial investors, members of America's largest age group who are born between 1981 and 1996, have little experience as adults of a bear market or economic recession. As a result, they are at greater risk of panicking and aggravating a downturn, according to several economists and market analysts, as outlined by Business Insider.

"It very likely is going to heighten odds of some sort of a panic," said David Rosenberg, chief economist and strategist for Gluskin Sheff and Associates, who is renowned on Wall Street for predicting the housing bubble that ignited the Great Recession.

Why Millennials May Panic

  • S&P 500 has gained over 300% in past decade
  • Federal Reserve has stepped in to help markets, kept interest rates low over 10 years
  • Dominants styles of trading and analysis, focused on single economic indicators, could miss bigger picture

Source: Business Insider

Missed Indicators, Big Mistakes More Likely

Unlike past generations of new investors, Rosenberg and others say that the unusually benign qualities of the last decade, such as long-lasting growth, historically low interest rates, and accommodative central banks, have left millennial traders unprepared for sustained upheaval or a bear market. Millennials who joined the financial industry or began investing over the past ten years might be unaware of how unusual the recent conditions have been. He and others are concerned that this means painful mistakes, or missed indicators, are more probable now than ever when the current bull market or economic expansion eventually sees its day.

"They've only lived through half a cycle over a decade, and you can't help but build up a certain level of hubris,” said Rosenberg, who cited his own career start at Bank of Nova Scotia on Black Monday, October 19, 1987, when the Dow Jones Industrial Average (DJIA) index tanked 23%.

Volatility Could Double This Year, Per BofA

Analysts Bank of America Merrill Lynch echoed that sentiment, pointing out that millennials will be especially ill-equipped to deal with looming market volatility, per CNBC. Based on the slope of the yield curve, BofA strategists predict that volatility could double in 2019. The firm pointed out that the largest cohort of financial services employees — now 25 to 34 years old — has never dealt with that whiplash.

"The most memorable early event of their careers was likely the Financial Crisis," BofA equity and quant strategist Savita Subramanian said in the note. "Growth and momentum stocks have outperformed for their entire careers, whereas value investing has been a losing proposition."

Dr. Lacy Hunt of Hoisington Investment Management, with over five decades of experience on the Street, is worried that millennials will miss the big picture, thanks to the dominant styles of trading and analysis which have been popularized over the recent decade.

“They're going with momentum," he said. "The algorithmic trading enhances all that, too. You get swept up in that mindset."

Other strategies such as “buying on the dip,” could hurt millennials who aren’t factoring in the possibility of a long-term decline.

Looking Ahead

It’s important to note that millennials are also a gutsy bunch. The cohort bought up a ton of big techs in 2019, such as Facebook Inc. (FB) and Apple Inc. (AAPL), when other investors abandoned them, as outlined in an earlier Investopedia story. Now, many of the recent laggards are again leading the market in 2019.

The younger generation of traders are more apt to buy shares of companies in growth industries, and riskier bets with potential for outsized returns, or major losses. For instance, three cannabis stocks, Cronos Group Inc. (CRON), Canopy Growth Corp., (CGC) and Aurora Cannabis Inc. (ACB), were the most popular among users on popular millennial trading app Robinhood this year.

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