September 18, 2013 Update

DJIA:15,530 S&P 500:1,705 NASDAQ:3,746 Gold:$1,300 Oil:$106.04 EURO:$1.34 YEN:98.99

Generational Risk Taking

The practice of parenting has a long history of teaching the next generation a set of behaviors and values that parents feel will help their kids live a comfortable life. In the United States, the American Dream (that is, owning a home that one can comfortably retire in) is a common goal shared among every generation. But over the past few decades, there has been a shift in the way Americans prepare for their golden years. In 1979, 62% of all retirement plans were defined benefit plans, 22% were a combination of defined benefit and contribution plans, and 16% consisted of defined contribution plans (The Department of Labor). In both the private and public sectors, pensions were the most popular approach towards preparation for retirement. But  ten years later in 1989, the pattern began to shift and pension plans started to decline while defined contribution plans gained momentum. And by 2011, the way people saved for retirement completely changed as 69% of retirement plans were defined contribution, 24% were a mixture, and only 7% of Americans were enrolled in a pension plan. This huge adjustment has not only flooded the bond market, but has changed the way generations budget, invest, and take risks; and is indicative of the shift in risk, and people taking more control over their financial futures. According to Dennis Miller, corrections in the market over the past fifteen years have had lasting effects on investing behavior. Baby Boomers have watched their pensions and savings vanish, and, as a result, have lost their appetite for risk. Many of them are no longer invested in equities, are are only using fixed income instruments to prepare for retirement. Baby Boomers have passed on lessons of risk aversion to Generation X (born between 1965 and 1980), who, as a result, have the lowest asset to debt ratios compared to any older group (largely thanks to the 27% loss of home equity during the crisis). In order to generate alpha, there has to be beta. Growing up in an extremely volatile market environment and watching Gen X’s equity get washed away, it appears that millennials (born between 1981 and 2000) are comfortable taking more risk than the previous generations for less reward than ever before. With interest rates so low, the incentive to save is not as strong as it is to borrow. And with the jobless rate as high as it is, thinking about retirement when employment is highly uncertain is inconceivable to many in my generation. Millennials have watched their parents loose their homes, life savings, cars, and jobs. And as a result of this, I think they have higher thresholds for risk with the hope that it will lead to more rewards because many believe they have witnessed the worst that could happen. And who knows what the increased education levels and ambition that comes with the mounting student debt will lead to, for it is easier to criticize than it is to understand and far easier to plan for this week than it is for next. What will come of the increased appetite my generation has for mispriced risk and what effect will it have on those born after 2000?

Domestic News

• Market Update Futures are slightly higher as investors await the market’s reaction to the Fed’s decision.
• The Commerce Department will release data on housing starts at 8:30, which are expected to rise to an annual rate of 921,000 in August from July’s 896,000.
• The Federal Reserve will release a policy statement at 2:00, which is forecasted to be an announcement of the start of tapering the $85B monthly asset purchases. 

International Updates

Asia

• Market Update  Markets were mostly lower ahead of the Fed’s decision. 
• New-home prices in China rose in 69 out of 70 tracked cities in August, increase 8.3% YoY throughout the country. 

Europe

• Market Update  Markets mostly pushed higher ahead of the Fed’s policy announcement.