Understanding the different nuances between generations can give investors great insight into stock market trends. For example, millennials (born from 1981 to 1996) are more likely to be invested in financial, energy, real estate, information technology, and emerging technology stocks than any other sectors, according to a recent Motley Fool study.
Armed with this information, investors can understand their own or others' biases that may affect their investment decisions. With millennial investors reaching their peak earning years, understanding what makes them tick could help rationalize what the markets do over the next few years.
Here's what millennials own
Of the five sectors mentioned above, they are all equally loved, with the sectors owned by 31% to 35% of investors. So why are these more favored than other sectors? The same study found that millennials' highest priority for investing was "potential for long-term gains" and "historical performance."
Both information technology and emerging technology have had a great decade. They are far from done growing, checking both of the boxes for aspects that are most important to millennial investors. Companies like Nvidia and Microsoft are prime examples of stocks that have led the tech sector higher throughout the decade. On the flip side, financials, energy, and real estate have not outperformed the broader market in the last decade.
With millennials preferring these underperforming sectors yet valuing the potential for gains and historical precedence, there seems to be a disconnect. However, some recent factors may shed light on this situation.
There is one outlier in the group
While the real estate sector in the stock market hasn't performed as well over the decade, the housing market has marched practically straight up in the same period.
US House Price Index data by YCharts
The real estate sector is massive, so millennials may not be investing in underperforming real estate market segments. Instead, they are likely using their personal experiences from the rapidly rising housing market to drive their investment decisions. Millennials may also have noticed an uptick in warehouses as they drive along the outskirts of cities that supply the goods they buy online. Many of these warehouses are owned by Prologis, a massive warehouse real estate investment trust (REIT). Millennials also experienced the real estate crash of 2008, and familiarity with this segment may have also influenced this decision.
Energy may not have had a great decade, but it's having an excellent 2022. As of Nov. 9, every S&P 500 sector is down over the past year, except for energy; it's up 60% versus the market's 16% drop. Additionally, many of these companies were severely undervalued. This checks out because the most common type of stock owned by millennials was value stocks. This year, Occidental Petroleum and Constellation Energy have been the top S&P 500 performers, but the 15 highest-gaining stocks in the S&P 500 are also energy stocks.
The Financials sector is the last one that doesn't match any of the previous explanations. Although financials have outperformed the broader market over the past year, the segment is still down 12%. Over more extended periods, financials have severely underperformed the market. Additionally, 60% of millennials own some cryptocurrency, which directly opposes financial companies (in fact, more millennials own crypto than stocks).
So what's the takeaway from the financial sector? First, investors may want some balance. Tech can be volatile but offers a maximum return. Energy is undervalued; even with its impressive return this year, it still could have more room to run. Particular real estate sectors have performed exceptionally well, and the housing shortage could extend the performance.
All of these investment types have significant risks to them, but financials are fairly steady businesses. The balance that the financial sector provides millennial investors is likely why so many own it. Banks like JPMorgan have played this role for investors in many generations, and millennials are no different.
Millennials may have a broad taste in stock market sectors, but that's a good sign. Diversification is an intelligent strategy; millennials seem to have accomplished that with their favorite sectors.
