Bear markets can be vicious for your portfolio.
But portfolio pain aside, they have a way of sparking incredible societal progress.
When crises hit, humans have more reason to innovate. And they often rebuild stronger than ever. History has shown us this time and time again.
There’s no sugar-coating it: Last year was depressing, and we’re turning the page to what could be another challenging chapter. But if you pay attention to the emerging trends in society, you may find a few reasons for hope in the year ahead.
To kick off the new year, let’s crack open our investors’ almanac — a compilation of some of the biggest trends that could define the world in 2023. They’ll give you a sense where we’ve been and where we could be heading, as we pick up the pieces from yet another bear market.
The world has been slowly shifting toward a renewable energy future for years, prodded along by the adoption of alternative energy sources and climate-friendly policies.
But 2022 taught us a hard lesson: Energy security isn’t a guarantee, and the world can’t survive on fossil fuels alone. The breakdown in global trade after the Ukraine invasion caused a massive energy shortage worldwide, leading to a spike in gas prices and a crisis in Europe.
It was a year of encouraging progress, too. Congress passed one of the most significant climate funding packages in history — $400 billion committed to renewable energy initiatives in the Inflation Reduction Act. And at the end of the year, scientists in California announced that they achieved a fusion reaction — or a process that produces more energy than it started with.
Many of us have dreamed about a renewable future, but last year’s ups and downs proved that reality may not be far away. The Ukraine fallout forced governments around the world to actively think of alternatives, with traditional energy sources at risk. Because of that, IEA now projects that renewables will become the dominant source for global electricity generation as soon as 2027, with clean energy capacity expected to surge 85% over the next five years.
Even more importantly, alternative energy is becoming more accessible for the average consumer. The Inflation Reduction Act included provisions for making energy-efficient consumer applications like solar panels and electric vehicles more affordable. Even large automakers like General Motors and Ford are stepping into the electric vehicle market. What was once seen as a niche luxury may now be attainable.
It seems like all the pieces are coming together for a clean energy boom, and investors are catching on. In our latest Retail Investor Beat survey of 10,000 investors, 36% of them said clean energy is a theme they’re considering as we head into 2023. It’s hard to say how the sector could perform over the next year or so, but clean energy’s astounding progress lately could make the long-term outlook especially bright. Investment ideas aside, we can all be happy about a more sustainable world.
Yes, but… Has the market already baked in all the optimism around clean energy? It’s a good question, considering the industry’s surprisingly strong year in global markets. For now, it may be wise to tread carefully. Many renewable energy stocks are trading at high prices relative to their profits. But this theme likely won’t go away any time soon, especially with political power building behind it.
Since the end of the Cold War, the global economy has slowly developed a web of connectivity. Different regions developed trading relationships with each other, and products made or sourced from abroad became the norm for many of us.
Lately, those connections have frayed, especially those between the US and China. Then, the pandemic tested them, and the Ukraine invasion severed them.
Much of the world effectively boycotted Russia, and nearly a year later, we’ve seen a new global trade system evolve. Larger, self-sufficient countries and smaller emerging nations have seen more demand for exports, while regions that relied on Russia have rushed to find alternatives.
Global trade is breaking apart in a process experts call deglobalization — or the movement toward a less connected world, including countries that are less dependent on each other for resources. It’s like the world has split into different cliques, instead of acting like one big friend group that constantly swaps clothing.
Deglobalization has been a slow, painful transition that’s led to soaring prices and humanitarian crises around the globe. But it’s also led to a shift in trade power, one that has largely benefitted the US. After the Russia-Ukraine invasion in February, the US’ trade balance with other nations narrowed for five straight months, implying that we exported more goods and services to other countries relative to what we imported.
Lately, we’ve seen trade volumes stabilize, a good indication that trade hasn’t completely broken down and global demand is still healthy. Barriers to trade could stay high for a while, though. On the domestic side, the US has started to source within its own borders. In fact, businesses are on track to bring about 350,000 manufacturing jobs back to the US this year, the highest in at least a decade, according to Reshoring Initiative estimates. A 2021 Kearney study also found that companies are warming up to “nearshoring,” or bringing their offshored manufacturing closer to the US and staging the final steps of assembly closer to home. It’s a noble effort that could increase reliability and cut down on production times, but it could also keep costs high and prices expensive.
Deglobalization is a wide-reaching trend that could impact our everyday routines. You may not be a global investor, but you almost certainly use manufactured goods from overseas. And you might invest in companies that are more internationally exposed than you think.
But on the bright side, fractured global trade could present some interesting investing opportunities, if you’re willing to look. A boost in American manufacturing could benefit small suppliers in the US, and other countries could reap the benefits of new trade relationships.
Yes, but… Deglobalization isn’t an overnight process. It’s a slow and grinding regime change that could bear unintended consequences. And it’s hard to see global trade break down entirely. Overseas manufacturing is still enticingly cheap, and some countries could opt to deal with future trade headaches simply because of lower costs. Economies of scale can be a powerful motivator.
Remember a few weeks ago when AI-generated profile pictures and ChatGPT poems were all over social media? It was an entertaining craze, but it reminded us of an uncomfortable truth: Robots can do a lot of what we can do. And sometimes, they can do it just as well at a lower cost.
Of course, this isn’t a new trend. Science fiction has dreamed up a world of robots for decades, and AI research has existed since the 1950s. But the friction we’ve endured during the pandemic has forced many of us to think of new and innovative ways to live our lives.
Shortages still seem to be everywhere — from workers, houses and cars to electricity and baby formula. They’ve complicated our daily routines, led to sky-high inflation, and caused a real headache for manufacturers — and by extension, corporate America.
If you had to sum up the pain into one data point, check out productivity, or the amount of output per hour worked. This year, productivity dropped the most since the 1980s — meaning workers were the most inefficient with their hours in decades.
And before you blame it on quiet quitting, check out this Census survey data on plant capacity. Shortages and logistical problems have soared for factories since COVID began, and there doesn’t seem to be any reprieve in sight.
To fix this, companies are handing the reins over to robots. OK, I’m exaggerating a little — but they are investing in logistics and automation to insulate their operations from another supply shock. 60% of small businesses are focused on investing in new tools as they consider their cash flow management and increasing costs, according to an American Express survey published in November. In 2021, installations of industrial robots in the US surged 31%, based on International Federation of Robotics estimates.
Corporate America got too stingy with its money, with pay and capital spending growth stagnating in the 2010s. But the pain of the 2020s could force businesses to think about operational resiliency, which could be a boon for companies offering robotics, automation and supply chain solutions.
Yes, but… Robots aren’t exactly taking over the world yet. Many companies are cost-cutting in anticipation of a recession next year, so future growth isn’t the first thing on their minds. For now, at least.
Also, AI comes with its own set of operational and ethical challenges, and shortages are a comprehensive societal problem that you can’t just train a robot to fix. We may need policy, cooperation, and some luck to overcome the COVID-fueled friction.
This feels like a turning point, but don’t forget the power of human connection and creativity.
Sometimes, the most important market drivers lie in demographics.
Right now, there’s a demographic you can’t ignore. They’re the largest generation alive, whose cumulative net worth has nearly doubled in the past two years.
Yes, folks, we’re talking about the millennials.
Millennials have been long seen as a polarizing generation that constantly got the short end of the stick. But over the past few years, millennial wallets have finally been able to catch the right side of an economic shift.
They’ve benefitted more than other generation from the strongest job market and wage growth in decades. Many of them reached their prime home-buying years during a stretch of historically low mortgage rates and started investing at the depths of COVID. This summer, a large swath of them found out they’d have at least a part — if not all — of their student loans forgiven (if the courts agree). And we can’t forget that they’re on the other side of a $68 trillion wealth transfer from their parents, the baby boomers.
When one-fifth of the American population is coming into their economic power, it’s worth paying attention to how they spend and invest their money. After all, when the baby boomers hit their 30s, the US economy embarked on two of its longest economic cycles in recent memory: a 7.5-year expansion starting in 1982 and a 10-year cycle beginning in 1991. I’m not sure that’s totally a coincidence, either.
So, how are millennials changing the world? Well, they’ve been more committed to crypto than other age groups, according to our quarterly Retail Investor Beat surveys from the past year. They use social media and online forums for financial advice, and they value access, community, and meaning. Many of them are in their prime household formation years, meaning that they could flock to the housing market regardless of prices or mortgage rates.
Most notably, they’re stubborn — in a good way. They tend to gravitate towards do-it-yourself investing, which has pushed public companies to think more about how to appease their shareholders. That’s why you’ve seen more stock splits, shareholder initiatives, and social media campaigns from deal-hungry billionaires as of late.
Yes, but… It hasn’t been an easy few years for anyone, and plenty of millennials are still saddled with student loans while staring down a recession and rampant inflation. Inflation can be especially pernicious on lower and middle-class budgets, too. According to our latest Retail Investor Beat survey, a larger share of younger investors expect to invest less in the coming months in order to save, pay down debt, or cover higher household bills.
It may be hard to conceptualize just how much society has progressed over the past few years. You certainly couldn’t tell by most of the harrowing headlines. But even though 2022 felt like a nightmare, it thrust all of us closer to a more resilient future. After all, necessity is the mother of invention.
As we enter 2023, don’t lose sight of how society is changing for the better. Sometimes, the best investment ideas come from what’s happening in the world around you.Ultimately, I have no idea what will happen in 2023. Nobody does, so take anything I say with a massive grain of salt.
But what I do know is that the ground is moving underneath us. Keep your eyes open for trends that could emerge from the ashes.
*Data sourced through Bloomberg. Can be made available upon request.
**The Q4 2022 Retail Investor Beat was based on a survey of 10,000 retail investors across 13 countries and 3 continents. The following countries had 1,000 respondents: UK, US, Germany, France, Australia, Italy and Spain. The following countries had 500 respondents: Netherlands, Denmark, Norway, Poland, Romania and the Czech Republic.