“The predictable increase in spending drives niche products into the mainstream market and transforms small specialty companies into corporate giants.”

The second season of the 80-year economic cycle occurs as the innovative generation ages and enters its peak spending period. The result is a Growth Boom, which divides into two distinct phases, Growth Boom phase one and Growth Boom phase two.

Falling inflation rates and improved productivity characterize the first phase of the Growth Boom. The current Growth Boom started in late 1982, when the huge population of baby boomers began to enter their peak spending years.

This predictable increase in spending has one important effect. It drives the innovative products and services that this generation introduced out of small niche markets into the mainstream. Such products and services enter the growth phase on the S-Curve, which in turn stimulates the growth of the companies that produce them. As a result, in the first phase of a Growth Boom, large company stocks outperform small company stocks as you can see in the chart below.

Click chart for larger view

“As inflation rates fall dramatically, investors see the best performance from long-term bonds and fixed-income securities.”

The aging of the innovative generation produces a second important effect. Since the economy as a whole is no longer financing the training and development of new workers and new companies at the same level of intensity, inflation falls dramatically. The falling inflation rates characteristic of this season create the best performance from long-term bonds and fixed-income securities you will see in the entire 80-year cycle.

To recap, your best investment choices for phase one of the Growth Boom are:

• Large cap stocks

• Residential real estate

• Long-term bonds