Five reasons a ‘Roaring Twenties’ is still possible

30th August 2022 08:57

by Sam Benstead from interactive investor

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Despite the doom and gloom, there are reasons for investors to be cheerful, Sam Benstead writes. 

Celebration toast with champagne picture.

After the pandemic, before inflation surged, a “roaring” decade of rising stock markets and booming economies was on the cards.

But that dream scenario met an abrupt end when interest rates were jacked up to fight sticky inflation, and the rising cost of living ate into discretionary spending. In response, stock markets have tumbled this year, and house prices are forecast to decline as well.

Nevertheless, hope is not lost for the remainder of the decade. Jason Draho, head of asset allocation at UBS, has put together a list of reasons why the fortunes of the economy – and the stock market – may turn.

Faster wage growth

While wage growth is currently slower than the inflation rate, leading to an inflation-adjusted decline in spending power, if inflation comes down to normal levels and wages keep rising, it will boost the economy.

In the US, average wage growth is about 5.5% and even higher for low-skilled workers, but average real (taking into account inflation) wage growth is currently –3%.

The good news, according to Draho, is that real wages should rise significantly over the next year as headline inflation falls much faster than wage growth.

Public infrastructure and R&D boost

The passage of the CHIPS and Science Act and the Inflation Reduction Act in the US, combined with an infrastructure package passed last November, will result in about $1.2 trillion (£1 trillion) of spending and tax incentives for the rest of the decade focused on public infrastructure, semiconductor production, energy transition technologies, and funding for basic R&D.

The spending will ramp up in 2023, with the bulk of it spent in the next five years. This is likely the last sizeable fiscal spending for at least a few years, with Republicans poised to regain control of the House of Representatives and elevated inflation discouraging additional spending, according to Draho.

More spending is good for the US economy so long as inflation is under control. A healthy US economy is good for the global economy.

Energy transition

The global transition to clean energy and net-zero carbon emissions was well under way last autumn, but Russia’s invasion of Ukraine has only heightened the need to invest in energy security. All this will require many trillions of dollars in public and private investment over the next two decades.

The race to create a greener economy should be a boost to growth, according to Draho. However, he said it could also be inflationary as the labour and materials needed to make this transition will remain in high demand, and the need for energy security only exacerbates this risk.

Digitalising business models

Draho notes that the past two and a half years have demonstrated that companies can successfully deploy technology to efficiently run their businesses in ways thought inconceivable pre-pandemic.

Now moving into an endemic state of Covid, entire business models will increasingly be built around digitalisation, potentially resulting in greater efficiency gains.

The commitment to moving in that direction was evident when software companies realised their earnings data for the spring quarter, showing resilient IT spending. This was driven by the critical nature of software as companies are not putting digital transformation projects on hold.

Increased risk-taking

Very low sentiment among households, small business owners, and CEOs about the economic outlook would suggest that risk-taking is being curtailed, but there’s not much evidence of that happening, according to Draho.

While sentiment surveys indicate pessimism about the overall economy, responses to how people view their own circumstances are much more positive. This optimism about one’s own situation helps explain why entrepreneurial activity remains high in the US: there are lots of job openings, people are voluntarily quitting their jobs, and investment spending has stayed robust.

These actions collectively speak louder than words on the outlook, and this willingness to take risks is another boon for economic dynamism.

Draho said: “The bottom line is that the secular bull case may not be what it could have been a year ago. But factors at work in the economy currently falling under the radar suggest that, starting in 2024, the rest of this decade could look more like the second half of the 1990s than the second half of the 1970s.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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