How reliable are trends?

As investors, it’s natural to obsess over the issues of the day — whether that be inflation reports, stimulus packages or Fed tapering of bond purchases.

But there’s another topic that has taken a backseat amid this summer’s other news: the 2020 census.

The census is fascinating because it looks at how the population of the U.S. has changed over a 10-year timeframe.

How does that relate to financial markets?

Well, ultimately, it is people and their behaviors that drive the goods and services that companies offer, and these are the companies that make up the stock market.

A few of the key takeaways from the 2020 census1 are:

  • U.S. population growth is slowing: The U.S. population grew by 7.4% over the past 10 years to 331 million. This represents a slowdown from the 9.7% growth rate for the 2010 census. In fact, it was the second slowest rate of population growth the census has ever recorded, just behind the 7.3% growth in the 1930s, which is often attributed to the Great Depression.
  • U.S. population is aging: The combination of falling birth rates and aging baby boomers caused the share of children in the U.S. to decline. Adults over age 18 made up about 78% of the population in 2020, representing an increase of more than 10% from 2010. The population of children under age 18 is about 22% of the total, which is 1.4% lower than the 2010 census.
  • U.S. population is becoming more urban: Most of the population growth of the past 10 years took place in metropolitan areas. “Around 80% of metropolitan areas saw population gains, while less than half of the smaller so-called micropolitan areas did. Phoenix was the fastest growing of the nation’s top 10 cities. It moved from sixth to fifth, trading places with Philadelphia, which is now the nation’s sixth-largest city.”2

The challenges of using trends to make investment decisions

There is nothing earth-shattering in the big-picture takeaways, as these mega-trends have been observed in U.S. census data over the last several decades. But it’s important to highlight some of the challenges of using these trends (or any trends) to make investment decisions.

We are bound to hear from pundits about how the country is changing and what that may mean for the stock market and our communities at large. Keep in mind that it’s extremely difficult to predict the future and the timing of any trends, even if the pundits are accurate. As we have seen from the COVID-19 pandemic, these trends can change suddenly because of unexpected events.

One of the popular narratives around the demographic data and its impact on the stock market was that, as the aging baby boomer population retired and began selling stocks to fund their retirement, it would cause a decline in the stock market. The oldest baby boomers began retiring in 2011, and we are now well into their 10th year of retirement. Meanwhile, the U.S. stock market has returned an annualized 14.9% since January 2011.

To put that in dollar terms, if you had invested 100,000 dollars into the stock market in January 2011, it would now be worth over 400,000.3

With any narrative, we must also recognize there is the potential for an unexpected event to occur and turn a trend on its head. This makes me think of some of the themes I was hearing pre-pandemic:

  • Millennials don’t want to live in the suburbs, so the value of your single-family home (the largest asset for many households) is bound to decline
  • Gen Z only wants to take rideshares; driving your own car is going to become the equivalent of driving a horse-drawn carriage

I would be the first to acknowledge that these themes seemed compelling as I heard my friends and family members express their preferences and saw their purchase decisions reflect them. But fast forward just one year and we found ourselves in a very different paradigm.

With the pandemic underway, families wanted more space to spread out and work remotely. You even heard about some of the steadfast city dweller crowd moving to the suburbs. The demand for homes has increased while inventories are at lows. Recent data shows that the average home price has risen over 18% from last summer, and this is not concentrated in a few regions of the country — home prices are up nationwide.4

On the vehicle front, we have seen some similarly unpredictable shifts with the use of rideshare services plummeting in 2020. Although rideshare sales have rebounded since the lockdown lows, they have yet to recover to prior levels. Meanwhile the prices of used vehicles have increased more than 40% over the last 12 months and are a key driver of inflation.5

Rideshare monthly sales
Source: Bloomberg SecondMeasure

Mitigating your risk with a well-diversified portfolio

Now, some of these changes in people’s behavior may be transitory, and it is possible that we see individuals start moving back to cities and rideshare activity recover and even exceed prior levels.

But the point here is that even trends that seem compelling have the possibility of being turned upside down by events that are well beyond our control, which is why you should be careful about making investment decisions based on them.

A well-diversified portfolio provides you with exposure to what is trending, but also to those parts of the market that have the potential to perform well if those trends are reversed.

If you need assistance crafting a well-diversified portfolio, reach out to an advisor at Wipfli Financial.

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How reliable are trends

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Rafia Hasan

CFA, CFP® | Principal, Chief Investment Officer

Rafia Hasan, CFA, CFP®, is the Principal and Chief Investment Officer for Wipfli Financial Advisors, based in Chicago, IL. Rafia leads Wipfli Financial's Investment Committee and has a deep knowledge of the financial markets, specifically in the areas of alternative investments and private equity. She also specializes in personal financial planning and estate planning for women investors.

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How reliable are trends?

time to read: 4 min