The post-pandemic financial boom of the 1920s was epic. Cars, radios and telephones became widespread, and the major market indexes were stuffed with the tech and consumer leaders of the day – from American Telephone and Telegraph to Westinghouse Electric. Brokerage houses proliferated, and new investment trusts enabled ordinary people to buy stocks in a snap. Mom-and-pop investors flocked to the market, many using risky margin loans requiring a scant 10% down, and stock prices soared.
Investing gurus see parallels today, primarily in outsize stock-price gains and an influx of individual investors into the market. Despite some rocky days in early fall, stocks have doubled since the end of the 2020 bear market through early October, including dividends. Margin debt was at record levels at the most recent count.
Individual investors reported more than a 70% portfolio allocation to stocks for seven straight months through September, according to surveys from the American Association of Individual Investors – the longest streak since the tech-bubble days and well above the average of 61%. Stock-speculating communities on social media have exploded, as have accounts on trading apps such as Robinhood (HOOD).
"I have no doubt that the nuttiness that is pervading Wall Street today will ultimately go down in history books as rivaling the dot-com foolishness of the late '90s tech bubble and the highly leveraged investment trusts of the late 1920s," says Jim Stack, president of market research and money management firm InvesTech.
Stocks have logged some hair-raising pullbacks of late. But the pandemic-induced bear market of 2020 lasted all of a month. "All it taught new investors was to buy the dip," says Stack. "When the next true bear market strikes, there's going to be a lot of lessons from Wall Street's school of hard knocks."
No investor can contemplate a Roaring '20s redux without recalling the stock market crash that closed out the 1920s. The colossal bear market that ensued remains the record holder – an 86% plunge in share prices.
That's unlikely for the next go-around. Margin debt may be high, but investors today must put at least 50% down. The crash of 1929 ushered in the Securities and Exchange Commission in 1934, charged with protecting investors and requiring that publicly traded companies regularly disclose important business information. Laws protecting fund investors came in 1940. Following the crash of 1987, stock exchanges adopted "circuit breakers" designed to slow trading on dangerously volatile days.
As for replicating the Roaring '20s gains that preceded the crash, we may have logged those 1920s-style returns in the 2010s, says Sam Stovall, chief market strategist at research firm CFRA. The bull market of the 1920s saw a 395% rise in the S&P 500 Index, Stovall notes; the bull market of 2009 to 2020 rose a "very similar" 401%. (The average for all bull markets since 1921 is 163%, says Stovall.)
Still, a long-range forecast from investment giant BlackRock bodes well for stock investors over the next decade. BlackRock sees a 6.4% average annual return for large-company U.S. stocks – within a wide plus-or-minus band – working out to a nearly 90% cumulative gain.
What innovations will mark the 2020s, and how can investors cash in? Consider the promising investment themes (and the best funds that allow you to harness them) below. Returns and other data are as of Oct. 8, unless noted.
Rise of the AI Stocks
Imagine robots flipping burgers and dispensing prescription drugs. Or machines driven by artificial intelligence (AI) churning out company audits or performing the duties of a corporate director. Fleets of robo-taxis navigating city streets or the skies overhead.
"This isn’t science fiction," says Rob Lovelace, comanager of American Funds New Perspective fund. Life-changing innovations are helping companies cut costs, boost efficiency and provide better customer service. Investment opportunities for new machine-driven technologies are as exciting today as in the 1920s, when inventions such as the TV, bulldozer and pop-up toaster changed how we live.
Established leaders in AI include tech giants such as Google parent Alphabet (GOOGL), chipmaker Nvidia (NVDA), online retailer and cloud computing behemoth Amazon.com (AMZN) and electric car maker Tesla (TSLA). But don't overlook less-well-known companies and so-called pure plays with big growth potential.
It's hard to know which of them will end up winners over the long haul. Thus, the space's best funds, which give you exposure to a broad mix of companies, seem a prudent investment. The iShares Robotics and Artificial Intelligence Multisector ETF (IRBO, $43, expense ratio 0.47%) tracks an index of companies in developed and emerging markets that stand to gain from growth in robotics and AI technology.
Top holdings include Ambarella (AMBA), a maker of smart cameras that can be used for visual data analysis of real-life scenes (the technology could analyze a traffic intersection, for example, and note key details including the color of a pedestrian's purse, street signs, the color of traffic lights and vehicle license plates). Splunk (SPLK), another top holding, is a software firm that monitors and analyzes machine data to help companies identify cyber threats and gain a business edge. The fund's annualized return of 22.7% over the past three years tops the broad market's 17.1% advance.
The Global X Robotics & Artificial Intelligence ETF (BOTZ, $35, 0.68%) tracks the Indxx Global Robotics & Artificial Intelligence Thematic Index. The ETF's 36 holdings include companies specializing in business automation, industrial and nonindustrial robotics, and autonomous vehicles.
Top holdings include Intuitive Surgical (ISRG), which makes robot-assisted systems used by surgeons, and Japan-based Fanuc (FANUY), which makes industrial robots. The fund's 23.7% gain over the past year trails the S&P 500's 29.3% rise; its annualized 18.5% gain over the past three years has outpaced the index.
Space: The Final Investing Frontier?
It's not considered geeky anymore to be excited about space exploration. In fact, it's super cool. That's because it's now possible for ordinary people to hurtle into space (for a small fortune), thanks in part to a handful of billionaires who have helped create a space tourism industry.
Other innovative start-ups are pushing into space flight, too, which is helping to lower the cost of going into space. "Right now, the idea of space exploration is very exciting because we're hitting a tipping point," says Ark Investments analyst Sam Korus. "It now makes economic sense to go after a lot of these opportunities because costs have come down."
More exciting developments are expected over the next decade or two. Hypersonic travel (flying at five times the speed of sound) could cut the flight time between New York and Singapore to four hours instead of 18. Space manufacturing is possible, too. Zero gravity is an ideal environment for making high-end semiconductors, optical fibers and proteins for drug discovery, to name a few products. In time, we may mine space for natural resources. Ice deposits on the moon and on asteroids could be used to create oxygen and supply water.
But investing in space will take some patience and a bit of an iron stomach. Expectations are high, but it's early days, which means there could be turbulence ahead.
The Procure Space ETF (UFO, $30, 0.75%) currently holds 30 stocks in space firms that generate 50% or more of their revenue from space-related business.
The fund has soared 40.1% in the past year. The SPDR Kensho Final Frontiers ETF (ROKT, $41, 0.45%) has delivered a 24.1% one-year return tracking an index that emphasizes space-oriented companies but folds in sea exploration, too.
The recently launched ARK Space Exploration & Innovation ETF (ARKX, $20, 0.75%) invests in the many kinds of technological innovation, including 3D printing, energy storage and artificial intelligence, that are necessary for space exploration.
The Genomic Revolution in Healthcare Stocks
The mapping of the human genome has revolutionized the healthcare industry. Gene editing, early stage multi-cancer screenings and targeted cancer therapies are a few examples of the scientific breakthroughs over the past decade that were made possible through genomics (the study of the structure, function, evolution and mapping of genomes).
There's more to come.
McKinsey Global Institute estimates that genomics could become a trillion-dollar market over the next 10 to 20 years. Chief among these advancements will be the development of fast, efficient ways to diagnose, treat or even prevent cancer, infectious diseases and aging-related health issues.
These breakthroughs could result in "radical life extension," says BofA Global Research analyst Haim Israel. A cure for cancer using cell therapy could come between now and 2030, says Capital Group portfolio manager Cheryl Frank. "Therapies derived from genetic testing have the potential to extend lives and generate billions of dollars in revenue for companies that develop them."
The Fidelity Select Health Care Portfolio (FSPHX, 0.69%) is a member of the Kiplinger 25, our favorite actively managed no-load funds. The fund's three-year annualized return, 15.9%, beats all but seven healthcare funds. Manager Ed Yoon invests in early stage biotech firms and innovative medical device companies, as well as insurers and healthcare providers with steady growth prospects. The fund holds 118 stocks. UnitedHealth Group (UNH) and Boston Scientific (BSX) are among its top holdings.
The Invesco Dynamic Biotechnology & Genome ETF (PBE, $74, 0.58%) and the Ark Genomic Revolution ETF (ARKG, $72, 0.75%) offer more-focused approaches. The Invesco fund, up 10.2% annualized over the past three years, tracks an index of 30 stocks. Top holding Repligen (RGEN) makes products used by biotech drugmakers to make biological drugs. The ARK fund, up an annualized 36.7% over the past three years, is actively managed and holds 53 stocks. One top holding, Pacific Biosciences (PACB) of California, is a leader in long-read genome sequencing, a type of mapping that could offer a more complete picture of the human genome.
Crypto, Fintech Fuel a Cashless Society
Cash is so last century. These days, it's all about digital wallets. Instead of using paper money and coins, more people are paying for goods and services electronically through smartphone apps such as Venmo and PayPal (PYPL).
Underpinning the trend is the incessant buzz about bitcoin. Overstock.com (OSTK) has long accepted the cryptocurrency on its website, and you can use crypto to buy coffee at Starbucks (SBUX) – after some rigmarole – on its app. El Salvador has adopted bitcoin as legal tender, partly in order to bring those without a bank account into the economy.
But other merchants have stopped accepting bitcoin, and its future as a widely used currency remains murky. It's more the complex algorithm behind cryptocurrency, called blockchain technology, that is behind the shift toward cashless transactions. Blockchain cuts traditional payment-processing times from days to hours, and it is less vulnerable to fraud than traditional payment methods. Many financial firms, including JPMorgan Chase (JPM) and Wells Fargo (WFC), use the technology for certain cross-border transactions.
Digital wallets are big in countries with large unbanked populations. Many consumers in China, for instance, use smartphone apps such as WeChat Pay and Alipay instead of cash to pay for things. The central bank has been testing a digital version of the yuan on these apps to improve transaction efficiency and combat fraud. In the U.S., digital wallets could be a $4.6 trillion business by 2025, according to Ark Investment Management.
Rather than investing in bitcoin or other digital currencies directly, we think the best way to cash in on the benefits of crypto and the move toward digital payments is to focus on financial tech firms that enable these transactions.
The ARK Fintech Innovation ETF (ARKF, $50, 0.75%) is actively managed and holds almost 40 stocks in large and midsize companies. Square (SQ) and Shopify (SHOP) are top holdings. The fund's one-year return is 21.0%.
The Global X FinTech ETF (FINX, $49, 0.68%) tracks an index of 54 fintech stocks and has returned 22.0% over the past 12 months. The index includes mobile-payments firms and those that offer online lending platforms or use blockchain technology to provide financial services.
A Pet Economy With Legs
Pets, of course, are best known for companionship. But they are also big business.
The global "pet economy" saw a pandemic-related spike in pet adoptions driven by the shift to remote work and the need for emotional connections to combat loneliness. Research firm Global Market Insights estimates that the pet care market will grow from $232 billion in sales in 2020 to $350 billion by 2027, a 50% jump. "Our pets will play an increasingly important role in how we live," says Daniel Miller, manager of Gabelli Pet Parents. "This presents an incredibly compelling investment landscape."
More than four out of 10 millennial U.S. pet owners say they "think of my pets as my kids," according to a survey by research firm YPulse.
So-called pet parents are boosting spending on more-nutritious and higher-quality premium pet foods, animal-specific medicines, diagnostic tests and medical procedures, pet treats and pet health insurance. Pet food sales are forecast to grow an average of 7% per year through 2025, which sets it up to be the fastest-growing sector in the global food category, according to investment firm Barclays.
Animal health services also have a long runway. "Any pet you adopt has a 10- to 15-year span in terms of care," says Jim Tierney, portfolio manager of AllianceBernstein Concentrated Growth fund, which owns Zoetis (ZTS), a company that develops medicines and vaccines for pets.
For broad exposure to the animal health industry, consider the ProShares Pet Care ETF (PAWZ, $77, 0.50%). The exchange-traded fund is concentrated, investing in roughly 30 stocks. Among its top 10 holdings are Zoetis; IDEXX Laboratories (IDXX), which supplies diagnostic equipment to veterinarians; and Chewy (CHWY), the online pet retailer. The ETF's 26.7% return over the past 12 months is a few whiskers shy of the S&P 500's gain.
The Gabelli Pet Parents Fund (PETZX, 0.90%) is a mutual fund that invests in companies that derive at least half of their sales or profits from the pet industry. Its 19.6% annualized gain over the past three years outpaced the S&P 500. Holdings include Elanco (ELAN), a pet medicine and vaccine maker, and veterinary clinic provider PetIQ (PETQ).
Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.
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