In the world of investing, the passing of time is often measured by the different eras of market leadership that have shaped investors’ portfolios and the evolution of the economy to where it stands today.
Analogous to the way we have simplified and bucketed the prehistoric period into the stone age, the bronze age and the iron age, investors are known for naming much shorter periods of great transformation that have disrupted the status quo and generated the strongest or weakest financial returns.
Looking at stock market returns since 1896, the birth of electrification, alongside stable monetary and political systems, helped drive the bull market of the second industrial revolution to 1906, before the bear market of 1906-1921, a period of time linked to the First World War and the rise of the United States of America. For each financial epoch, there are a handful of defining features and standout trends.
From suburban consumerism in the post-war era to the growth of capitalism, the dotcom bubble, and the rise of China before the great financial crisis, the emergence of quantitative easing, and the dominance of the FAANGs; in short, there is always a story underpinning the movement of markets at any given point in time. We attach ourselves to narratives.
2020 has so far proven to be a year of disruption, grave uncertainty and change. The US stock market fell from a record high on Feb 21 into a bear market just 15 days later – a retreat that took 191 days during the global financial crisis. Then, as the stock market’s retreat became a rout on March 9 and the seven trading days following, two thirds or more of asset classes – including three different stock markets, government bonds, and a range of commodities and alternatives – posted daily losses. On two days they all went negative. Even with 20/20 hindsight, this period would have tested the resolve of many investors.
When a big rotation in the market occurs, ownership of incumbent market leaders remains a successful strategy up until the point it becomes problematic and you’re left holding stocks you no longer want to be exposed to moving forwards. Rather like those people who set up camp on the beach far enough inland to avoid the incoming tides, only to be rudely awakened by water rushing over their belongings.
I am not calling an end to the tech bull run, but its pace may begin to slow. It is beginning to face headwinds it has not previously faced.
For those questioning where the next wave of growth and returns for our retirement savings will come from, the accelerated transition to a digital economy raises opportunities across a range of sectors.
Technology can do great things, like track and trace the spread of a virus and allow entire businesses to function from employees’ homes, but in and of itself it is not a panacea for all industries and all ills. In fact, as today’s technology titans come under increasing scrutiny over data privacy and antitrust investigations, other sectors are poised to harness structural and secular changes that will define the investment landscape for the next decade.
In the same way the widespread implementation of electricity ushered in an industrial revolution on a scale never seen before, the healthcare sector, currently under the global spotlight, is ripe for a productivity revolution. We have been observing for some time an improvement in overall industry R&D productivity from leveraging the benefits of the technology revolution (such as significant gains in computing power, big data, AI, machine learning). This has driven continued breakthroughs in genomic medicine. The rapid pace of vaccine and therapeutic development for Covid-19 is proof of these advances.