Roaring Twenties 2.0
Kiplinger's Personal Finance|December 2021
Stock market boom? Check. Economy on fire? For now. But this century isn’t like the last in important ways.
NELLIE S. HUANG, ADAM SHELL AND ANNE KATES SMITH
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.

Sound familiar? 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%. Stockspeculating communities on social media have exploded, as have accounts on trading apps such as Robinhood.

“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 below. Returns and other data are as of October 8, unless noted.

RISE OF THE MACHINES

Imagine robots flipping burgers and dispensing prescription drugs. Or machines driven by artificial intelligence 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, chip maker Nvidia, online retailer and cloud computing behemoth Amazon.com, and electric car maker Tesla. But don’t overlook less-well-known companies and so-called pure plays with big growth potential.

Because it’s hard to know which of them will end up winners over the long haul, it’s prudent to invest in a fund that gives you exposure to a broad mix of companies. ISHARES ROBOTICS AND ARTIFICIAL INTELLIGENCE MULTISECTOR ETF (SYMBOL 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, 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, 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.

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