US and EU economies are slowly but surely showing signs of recovery. The development and application of new technology is also picking up steam - see image above.
How will these two trends impact the financial markets? And what lessons can traders learn from such trends?
This article attempts to connect advancements in technology to economies, and financial markets, explaining what key factors could play a key role over the next five years.
Bullish Employment and Inflation Trend
Last week's article indicated that the bullish economies within the US and EU could keep their momentum going for another one to three years, largely because:
- unemployment levels are decreasing;
- wage demands could propel inflation;
- inflation would spark interest rate hikes in the US and perhaps EU.
That said, we also noted that a recession risk - 31% in the next nine quarters according to Goldman Sachs - is increasing as the economic recovery after the Great Recession of 2008 could reach its limit. The current growth period of 95 months in a row is already the third best stretch (since economic cycles were measured in 1854) and it's even challenging the record holder of 120 months (set between 1991 and 2001).
Whether a recession will indeed be triggered, how deep it will be and how long it will last remain open and regularly debated questions. My view on the most likely path was already mentioned in last week's article "Bullish Economy and Inflation Faces Bullish Technology".
The timing, however, remains difficult to assess, but today's article focuses more on the impact of technology on the financial markets.
Which Industries Will Benefit from the Tech Boost?
The costs of technology in the field of robotics, automation, and information are set to continue decreasing, whereas the width and depth of their application is only increasing.
Robotic, information, and tech companies seem to be especially well positioned to benefit from the analysis of big data, automation, robotics, and other tech advancements. Their stock price could therefore have the potential for growth in the coming years.
Some of the winners could, among others, come from the following fields:
- information technology;
- cyber security;
- artificial intelligence;
- alternative energy;
- water cleaning and water;
- nano carbon;
- precision agriculture;
- data collection and networked companies (e.g. Google, Facebook).
However, the vast majority of companies will most likely also be able to benefit from the trends in robotics, automation, and information in one way or another. For instance, a cost reduction in robotics will not only give the robotics manufacturer more sales, but it will also benefit the buyer, who'll see lower capital expenditures.
Outcome: Stock Market Rally Followed by Over Supply
All in all, new technologies should enable many companies to boost their productivity while lowering their costs, which would boost their profit potential, at least in the short run (i.e. the next few years).
The increased profit potential could lead to a continuation of the stock market rally, which will now not be driven by central bank intervention via monetary policy and quantitative easing, but by lowered costs.
The increased productivity also seems likely to provide a (large) boost to supply, which could, in turn, lead to falling prices in the mid-term. The increased supply and lower price could therefore erode profit potential. How far prices might fall will depend on multiple factors, but a really important one is demand.
Source: The Future of Employment: How Susceptible are Jobs to Computerisation in the US.
Impact of Technology on Employment Levels
In the worst case scenario, demand could face its own problems in the mid-term. Technology could increasingly replace labour, which will lead to higher unemployment rates, diminished wages and reduced demand. This, in turn, could hinder long-term growth and profit.
The best case scenario is that new markets and jobs are created with a workforce that is also trained to handle and take on these jobs.
How likely is it that either version will play out? Or perhaps something in the middle?
When analysing the balance of labour versus technology, it is important to keep an eye on these two trends:
- Carl Frey and Michael Osborne examined the probability of computerisation for 702 occupations and found that 47% of workers in America had jobs at high risk of potential automation - see image above.*
- Frey also indicated that only 0.5% of American workers are employed in industries that have emerged since 2000. If the same rate of 0.5% of American workers remains constant, then new jobs might be hard to find.**
All in all, the chance of employment levels facing strong headwinds in the upcoming years is a realistic scenario. This, in turn, will have some impact on demand, too.
Whether you have a positive or negative view of technology, I'll personally be keeping a close eye on the following trends:
- will wages increase and will that impact inflation?
- will companies respond to higher wages with more investment in technology?
- which companies are best positioned to capitalise on automation, robotics, new technology, information and data?
What Lessons Can You Learn for Trading?
Cost reductions could benefit companies in general, but would be especially beneficial for tech, robotic, automation, and information data companies.
The next one to three years will probably see the usual winners and losers in the stock market, but those winners could win big.
However, it will be important to monitor whether increased supply and reduced demand could impact the markets (as explained in this article).
A stock market correction could occur if interest rates increase (2018-2020) or if company profits start to face headwinds.
For traders and investors it seems important to keep these trends in mind:
- Trend: financial markets could face increased volatility in the next five to ten years.
Solution: adding volatility protection into your trading plan can help. Admiral Markets has specific tools for this purpose, they're called Volatility Protection Settings.
- Trend: the speed of technological change is picking up quickly and picking the winners 10 to 50 years from now would be increasingly difficult.
Solution: long-term invest and hold model could run into some serious problems and traders could benefit from active and short-term decisions.
- Trend: a few stocks could reap large rewards but others could be left behind permanently (winners take all) as technology disrupts business and companies.
Solution: learn to keep your winners running and your losses short. See the video above to find out more about this concept.
- Trend: technology could become a competition for many jobs.
Solution: trading offers the opportunity to create a different income stream and to diversify assets in multiple areas.
With that said, you can find out more and make a great start by joining our live trading webinars and downloading our 60+ extra plugins with MetaTrader 4 Supreme Edition. Not forgetting those Volatility Protection Settings I mentioned earlier.
Cheers and safe trading,