Falling inflation, the conclusion of the supply chain crisis, a manufacturing boom and the growth of game-changing transformative technologies may spur a new era of growth.
Following considerable hullabaloo about a recession coming for months, current conditions suggest the opposite scenario is taking shape: The rise of a new bull market. It comes with the prospect of huge opportunities. A confluence of circumstances suggest the market could be entering an era reminiscent of the mid-1990s tech stock boom, with innovative technologies like artificial intelligence driving new value.
Preparation for a bull market, however, requires a whole new set of planning assumptions, investment strategies and product roadmaps. In other words, market participants need to prepare for a far different reality than what many experts led us to believe. And they need to get ready now.
From recession to bull market
Earlier this year, the market contended with worries of a recession amid rising inflation and associated rate hikes. Investors pulled back as bank failures stoked fears of a protracted recession. There was a lot of doom and gloom about the future.
Recent indicators tell us the market recovery is likely to continue. Here’s why:
The stock market is showing positive signs. To put this in perspective, the S&P 500 index has risen more than 20% since October. The Dow Jones Industrial Average, also up more than 20% since October, climbed for 13 straight days in July, the first time since 1987. Meanwhile, the MSCI EAFE Index is up more than 30% since October.
The Federal Reserve raised interest rates from 5.25% to 5.5% in July. Though this is the highest level since 2001, there was a silver lining in the Fed’s assessment of how economic conditions will evolve: It is no longer calling for a recession. “The [Federal Reserve] staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” said Fed Chair Jerome Powell. He noted that “we do have a shot for inflation to drop to target levels without significant job losses,” the report said.
Economic data has been cooling recession fears. In July, consumer prices rose in line with general forecasts with an increase of 0.2% for the month. This followed June’s lowest annual increase of consumption expenditures (PCE index) since September 2021. Nonfarm payrolls showed a fall in the unemployment rate in July to 3.5%.
There are also signs the global economy is rebounding. In July, the International Monetary Fund raised its global growth forecast to 3%, up from its projection of 2.8% in April. The optimistic projection was largely seen as the result of the stabilization of the markets, despite being negatively affected by bank failures in the U.S. and Europe. Of course, there are risks to contend with, notably uncertainty about inflation and a slow economic recovery in China.
Meanwhile, supply chain pressures have eased, with the price of shipping containers, barge transportation, air cargo, trucking and warehouse capacity decreasing. These factors are pushing prices down.
Re-industrialization of America
Another overlooked phenomenon is what I would call ‘re-industrialization,’ which is linked to strong growth in factory construction. Indeed, investments in manufacturing facilities contributed to about 0.4% of GDP growth in the second quarter, the largest such contribution since 1981, according to recent research from the President’s Council of Economic Advisers. Companies are betting on demand to continue to grow. For example, Weiler, a maker of paving and forestry equipment, recently opened a 120,000-square-foot building at its Knoxville, Iowa, headquarters. Patrick Weiler, the company’s President and CEO, told the New York Times the company only plans to use a quarter of the space right now, in anticipation of growing demand.
Taken together, it appears increasingly likely that the so-called “soft landing” the Fed aspires to will bear fruit. Prices have come under control, the supply chain bottlenecks have been fixed, we have low inventory and factory construction is growing. As the economy stabilizes, these developments will yield jobs and steady income growth—without inflation.
This shift is occurring as younger generations—including Millennials and Generation Z—are reaching the investment stage of their lives. Positive investor sentiment is increasing, with approximately 45% showing bullish sentiment in late July—up from 19% in mid-March. We’re also on the cusp of a huge generational transfer taking place, with an estimated $84 trillion projected to be passed down from older Americans to Millennial and Gen X heirs through 2045, with $16 trillion expected to be transferred within the next decade. This new cadre of investors are entering a stage of life where they will be looking to invest and save.
The growth of disruptive technologies, parallels with the Internet boom of 1995
The groundswell of investment in artificial intelligence among major tech firms leaves many of us thinking we are on the cusp of a new era of value reminiscent of the Internet’s prospects in 1995. The growth of generative AI—spurred on by the viral popularity of OpenAI’s ChatGPT—gives us a mere preview of what we will be able to achieve, and the value unlocked by these transformative technologies. AI, like the Internet, will spur a new generation of products and services that will likely transform the way we live and prompt efficiencies across various industries.
“Investors recognize that this is an AI gold rush…the only parallel would be 1995 internet and [the] 2007 Apple iPhone moment,” said Dan Ives, managing director and senior equity research analyst at Wedbush Securities, who suggested AI will generate $1 trillion of incremental spend over the next decade.
Generative AI could add trillions of dollars to the global GDP, a recent report from Moneta Group observes. “It should be no surprise that individual companies will be adding billions to their market caps,” due to the boon of generative AI-driven business growth, the report said. Accordingly, AI-focused companies have seen their market capitalizations grow significantly. AI’s potential leaves much yet to be realized, writes Moneta Group. “The promise of AI is winners across industries as companies use the new technology to create efficiencies, increasing sales and profits. Yet, so far, the stock market gains have largely been concentrated in the few ‘obvious’ winners such as NVIDIA and Microsoft,” the report said.
AI is where the Internet was in 1995, which saw years of significant, tech-driven equity growth in prices. Investors should take heed of the transformative changes afoot and the new value that technological evolution will unlock.
David Russell is Global Head of Market Strategy at TradeStation.
