People spend money in very predictable patterns at predictable times as they age. Today, the Baby Boomer generation is entering its prime years for consumer spending. Economists will continue to fret about “over-extended” consumers and the dire consequences to come, however the boom in consumer spending will continue until those Baby Boomers see their children finish their high school years and move out. When that day finally comes, economists will be as clueless in trying to explain the downturn in consumer spending, and the subsequent massive decline in the financial markets, as they are now in explaining the current boom in spite of relentless adverse news.

Demographics - The Ultimate Forecasting Tool: Not Just for Marketing Anymore

Demographics target the finer segments of consumers by age, income and lifestyles all the way down to zip codes and neighborhood blocks. It predicts what new generations of consumers will do as they age, and it can similarly help us see key trends that will affect our future decades in advance. People do predictable things as they age. (The life insurance industry was the first to use this data for actuarial predictions to assess risk when creating life insurance policies.)

The first stage of the consumer life cycle is childhood and adolescence, at great expense to parents and governments. Next comes family formation; marriage at 26 which stimulates apartments and new stores for these new households’ accelerating the spending cycle. Then come children and your first home at 31, followed by your next home, more furnishings and cars, etc. Trade-up home buying and mortgage debt peak between age 37 and 42. You eat the most potato chips at 42, buy your fanciest car at 54 and consume the most wine at 56. Consumers furnish their homes and spend more on durable goods into the overall peak in their earnings and spending between age 46 and 50, or at age 48 on average. After age 50 the average household spends less for the rest of their lives. With quantifiable data on all of the key things we do as we age, trends are largely predictable decades into the future – locally, nationally and globally!

The Spending Wave

The Spending Wave charts below are excellent examples of the predictive capacity of the lagged birth index. It is a quantifiable fact that the average person enters the workforce at age 20.5 today and then earns and spends the most from age 46 to 50, or age 48 on average.

Charts: Generation Cycles -- Immigration-Adjusted Birth Index and the Spending Wave

It is not just the rising spending (demand), but the simultaneous rising productivity (supply) of an aging generation that creates an economic boom with rising stock prices from rising earnings and rising valuations along with low inflation. But when the generation finally reaches its peak spending and then slows down, earnings will fall dramatically and so will stock valuations – creating an extended downturn for many years.

Get Ready Greatest Boom in Our Lifetime!

Stock prices are set to soar, as the U.S. and worldwide economies accelerate its boom into 2010, stock prices will likely peak by late 2009 or 2010. Following this boom, an extended downturn will occur, which will be devastating for those not prepared. The Dow could reach 20,000-25,000 with the NASDAQ surpassing its old high above 5,000. During both the boom and the bust, certain industries and sectors will significantly outperform others. As we enter this last and tremendously profitable up cycle, proper asset allocation is critical. Going forward, it will be important to understand global demographic trends, worldwide economies, and international financial markets.

For Real Estate, the current correction in home prices will likely begin to stabilize shortly and at best, bring modest appreciation for a few years. The strongest demographic trends in home buying however, have clearly passed, and the housing market has peaked for what will likely be decades. Of course there will always be pockets of growth, but the big gains are well behind us. Not until the echo boomers (The boomers children) begin buying their first homes in a number of years, will the next real estate bull market evolve. (See our report on Real Estate)

Be the expert or hire one! Personal finance is serious business. In planning your life and especially your money, you need to get the fundamentals down pat and spend a lifetime updating yourself on the subject. The biggest mistake one can make is to fail to educate themselves or hire a Wealth Management specialist to take care of them. The media would have you believe that headlines move markets. I don’t know what is going to be the next “most-important-thing-ever” to the media. As powerful as wars, hurricanes, and oil spikes might be, the spending cycle of the American Baby Boom will continue to dominate the economy. When the boom ends however, it will be vital to your way of life that you know when, and how to be defensive and profit from it to at least keep pace with purchasing power (inflation and taxes). Cash or cd’s will not be an option as their rates will drop well below 1% as the Fed tries to stimulate growth by continuously lowering rates. For now however, let the good times roll!

During the tumultuous times ahead, keeping ahead of the curve will be more important than ever. For the most up to date information, please be sure that we have your email address.

Keith Springer is Registered Investment Advisor and President of Capital Financial Advisory Services, providing Wealth Management and Mortgage Consulting Services.

For more information on how to build and maintain a solid retirement plan, please contact Keith Springer at 916-925-8900 or keith@capfas.com,

http://www.capfas.com