Which is the largest generational cohort since the baby boomers?

Millennials are overtaking the baby boomers as the largest generational cohort of the U.S. population, and it could be a game-changer for markets and the financial services industry.

Let's first pin down this group. We define millennials as those born between 1981 and 1997. There are currently 79.4 million millennials, edging out the 75.5 million Boomers. Immigration could swell those ranks to 81 million by 2036.

Millennials are also the most educated generation in our history. Thirty-nine percent have at least a bachelor's degree, and the leap in educational achievement has largely been driven by women. Since 1982, the percentage of women achieving a bachelor's degree or higher has nearly doubled to 43% from just 21%.

The future of finance is female

The historical relationship between higher education and economic achievement is undeniable, and the case of millennial women is proving to be no exception.

For this generation, women earn 89% of what men earn, a gap slowly but steadily closing and higher than the average 80% across the board. Since 1980, women have also seen their earnings surge by 32%, while men have seen a small decline. Women are now the primary or co-equal earner in 66% of millennial households, financial decision maker in 62% of millennial households and investment decision maker in 55% of millennial households.

All told, women of all generations hold nearly $72 trillion dollars of wealth, account for 85% of all consumer purchases, determine 89% of decisions on bank accounts and own 40% of stocks.

Financial goals are evolving

For much of the last decade, the millennials lagged behind prior generations, plagued by higher student loan debt, stagnant wages and poor job prospects in the aftermath of the Great Recession.

Millennials, however, are now coming of age, marrying, and having children, and, at the same time, their economic fortunes have improved. This generation now earns more, with a median adjusted household income of $85,800, than young adult households did at nearly any time in the last half century.

We are also seeing a shift in their financial goals. Millennials save 36% more of their annual salaries compared to prior generations. Today, the average millennial portfolio has as much as 68% allocated to equities, according to data from FactSet, a significant leap from just a few years ago.

Here we are also starting to see a shift as millennials come of age and women play a larger role in financial decision-making. According to data from Accenture, millennial women rank retirement planning as the single most relevant financial topic, ahead of even student debt.

This generation also blurs the line between personal and societal well-being. According to Morgan Stanley, 84% of millennials cite investing with a focus on ESG (Environmental, Social and Governance) impact as a central goal.

Millennial women, in particular, approach risk differently than men. They tend to do more investment research, are more long-term focused and tend to respond less to short-term market events. According to a seminal study by UC-Davis professors Brad Barber and Terrance Odean, women on average trade 45% less frequently than men, and thus earned nearly 1% per year in better returns.

The impact on markets

Earnings, in the long run, are driven by technology, and we foresee higher profits driven by more efficient production, lower labor costs and easier access to global markets driven by technological advances.

The price-to-earnings multiple, in the long run, is driven by demographics. We expect that the country's largest generation, the millennials, with a higher-than-average saving rate, will seek higher rates of return on their savings via a greater exposure to equities, especially given their later start to investing.

As this generation takes its place at the center of the U.S. economy, it is critical that we understand their values, behaviors and preferences so that we can appropriately assess both opportunities and risk. We have already seen this play out in various parts of the economy such as retail and media, and we are now seeing it start to impact the markets.

We know that millennials, ever the disruptors, bring with them new perspectives on financial goals and investment advice. Moreover, the very face of the investing public is changing. Just think: when you look at a stock chart, it represents all of the past buy and sell decisions of investors in the face of ever-changing information. Up until now, those decisions were made primarily by men. That is no longer the case, and the implications are profound.

Steve Chiavarone is vice president, portfolio manager and equity strategist at Federated Investors. His is focused mainly on global asset allocation.

*This is adapted from a Federated note titled Millennials: Demographics, Finances & Investing, part of an ongoing series entitled OnPoint: A Series of Industry and Investment Insights. Sources for this letter (unless otherwise noted) include the U.S. Census Bureau (Census.gov [census.gov]), RBC Wealth Management, Pew Research Center and Bloomberg.

**Views are as of 8/13/2019 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

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