Consumer Spending Provides Unique Investment Choices

OCEAN CITY — With the U.S. stock market hovering near all-time highs, we advise being selective within equities to capture incremental performance. We believe consumer spending, long the bulwark of the U.S. economy and now close to 70% of gross domestic product (GDP), will continue to present both long- and short-term opportunities for investors.

Looking out over the next few decades, demographic trends are likely to increase the pace of change in lifestyles and spending patterns. Over a much shorter timeframe, there are tactical opportunities as the economy continues to improve and retailers gear up for the holiday season.

Baby boomers are now living and working longer than ever before. The U.S. Census Bureau forecasts the proportion of the population age 65 or older will grow from 15% in 2015 to 19% by 2025. The spending power of consumers aged 60-plus could approach $15 trillion by 2020, according to Euromonitor, an independent research firm.

With Boomers accounting for 73% of U.S. healthcare spending, according to BofA Merrill Lynch (BofAML) Global Research, health care stocks in particular could benefit from this growth.

According to our U.S. Equity Strategist team, the Health Care sector remains attractively valued across a number of metrics, despite its outperformance over the last several years and rising overweighting by mutual funds. Pharmaceutical stocks, in particular, could be beneficiaries of lengthening life spans and many of these stocks offer attractive yields as well as exposure to increased drug demand driven by the Boomers.

Thematic Investment Strategist Sarbjit Nahal highlights additional subsectors, including drug stores and anti-aging cosmetics. The anti-aging market is projected to grow by 57%, to $191 billion by 2019 from $122 billion in 2013, with skin care the largest segment.

Investors may also benefit from greater longevity in areas such as home renovation, senior living, healthcare facilities and healthcare REITs, the latter accounting for as much as 20% of senior housing. People age 55 and older make 50% of home renovation expenditures in the U.S., which are projected to steadily grow. Most baby boomers want to “age in place” and home improvements enable people to do just that.

The travel and leisure industry also poses opportunities as the Boomers enjoy both greater purchasing power and more free time. The travel market for U.S. Boomers is estimated at $120 billion, making them one of the most active segments, according to BofAML Global Research.

The real net worth of Boomers remains 25% below the levels seen in 2007, before the financial crisis, according to BofA ML Global Research. As they seek capital appreciation and income growth through their investments, as well as inflation protection, the S&P 500 stocks could be beneficiaries. More than a quarter of the stocks offer a dividend yield higher than the 10-year U.S. Treasury yield.

For the medium term, we recommend

approaching the broader sector cautiously; on a more tactical basis, we identify pockets of value within the retail subsector that could present short-term opportunities. Retail sales accelerated in August, up 5% year-over-year, as an improving job market, rising stock and home prices and a retreat in gas prices are making Americans feel more comfortable about boosting outlays. (A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)