By Daniel Skelly, Morgan Stanley
While investors often focus on daily headlines about the post-pandemic reopening and economic recovery, it’s important to step back and think about the longer-term impact of COVID-19. For investors, the question is not always what it means for the stock market next week, next month or even next year, but what are the implications over the next two to three years?
My team at Morgan Stanley Wealth Management sees three megatrends for investors to watch in the years ahead — and they are bullish for stocks:
1. A surge in consumer spending
Perhaps the most immediate driver of both economic growth and stock prices is a continuation of strong consumer spending, thanks to additional fiscal stimulus hitting the wallets of lower-income U.S. consumers.
The vaccine rollout and resulting reopening of the U.S. economy could also drive further spending on a variety of services, especially from higher-end consumers. Indeed, in June, Ellen Zentner, Morgan Stanley’s chief U.S. economist, forecast this year’s GDP growth at 7.1% as rising labor income boosts the buying power of U.S. households and excess saving remains an important cushion.
Conditions today contrast with 2008, when the housing market was the epicenter of the financial crisis. This time around, most consumers are not dealing with high debt or defaults, and banks remain financially strong and ready to lend to both business and individual borrowers. That could help drive faster economic growth.
2. An expansion of the digital economy
While we may dine out more and (maybe) venture to the movies, the world may never go back to exactly how it was in 2019. The forces of digital transformation already dominated consumer and corporate spheres prior to COVID-19 — and the pandemic has only hastened this multi-year trend toward digitization.
My colleague, Katy Huberty, an equity analyst who covers information-technology hardware, sees early evidence of business-model shifts that anticipate permanent changes in consumer preferences and accelerating trends in e-commerce and e-services. She also sees wider adoption of technologies such as cloud computing, collaboration tools, automation and data analytics.
With the pandemic pushing office employees to work from home, the past year saw a sharp 30% increase in corporate spending on tech hardware, and we anticipate higher spending on digital services, as the economy recovers and companies adjust to a “new normal.”
In fact, Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, believes that this imminent spread of technology throughout sectors, such as financials, industrials and health care, will define this cycle, in contrast to the consumer focus that dominated the previous tech cycle.
3. An emerging generation of millennial investors
Notwithstanding headlines about stock rallies fueled by young traders using social media, a much larger trend has actually arrived: the broadening of the equity investor base to include younger generations.
In 2019, millennials, those born between 1981 and 1996, overtook baby boomers as the largest demographic cohort in the U.S. population, accounting for 22%. Gen Z, born after 1996, account for another 20%. The first Millennials turn 40 this year, and their investment path looks similar to what Boomers experienced during their peak investing years in the 1980s and 1990s.
Currently, only 6.5% of Millennials’ assets are in equities, similar to the 6.0% allocation Boomers had at age 40.1 In subsequent years, the Boomers’ allocation to equities grew to over 25%, implying further stock-market inflows may be in store.
While that demographic tailwind is bullish for stocks, we also need to point out that valuations are higher today, with the S&P 500 Index’s forward price-to-earnings ratio of 21 vs. 12 in 1990. Even as demographic-driven equity-market inflows may support an upward trend for stocks, we’re unlikely to see a rerun of the magnitude of gains realized in the 1990s.
Preparing for a new market environment
With the expectation for resurgent growth powered by tremendous fiscal spending and a Federal Reserve committed to letting inflation run hot, our team believes that this cycle could be hotter — but shorter — than previous ones, as inflation picks up. Inflation is still rising from historically low levels, and equities have actually done best amid a low, but rising, inflation backdrop.
That means now could be an ideal time for investors to consider gaining exposure in their portfolios to assets that stand to benefit from longer-term shifts underway in consumer spending, digitization and demographic shifts.
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