Dow Jones index has soared 14% so far this year, while the S&P 500 index has jumped 16%, but the rally may have more steam left. Analysts at Morgan Stanley have narrowed it down to three megatrends that may push stock markets higher in the post-pandemic world. Wall Street equity indices have soared higher as the US economy re-opened and the vaccination drive accelerated. While NASDAQ and S&P 500 reached fresh all-time highs earlier this week, the Dow Jones had claimed a fresh high in May this year.
“While investors often focus on daily headlines about the post-pandemic reopening and economic recovery, it’s important to step back and think about the longer-term impact of COVD-19,” said Daniel Skelly, Head of Market Research and Strategy, Morgan Stanley Wealth Management. He added that investors should at times look at the larger picture and shape their portfolio for how stock markets will move over the next two to three years.
The first megatrend identified by Daniel Skelly and his team is the expectation of massive spending. “Perhaps the most immediate driver of both economic growth and stock prices is a continuation of strong consumer spending, thanks to additional fiscal stimulus hitting the wallets of lower-income US consumers,” he said. Helped by stimulus checks and lockdowns, the savings rate in the US went up to 33.7% in April 2020 from 7.2% in December 2019. “The vaccine rollout and resulting reopening of the US economy could also drive further spending on a variety of services, especially from higher-end consumers,” Daniel Skelly added.
This situation is different from 2008 when Americans were reeling under high debt. The spike in consumer spending is expected to aid faster economic growth.
Digital economy grows
During the pandemic companies, across the globe, have upped the ante when it comes to the digitisation of their operations. Morgan Stanley analysts say that the world may never go back to the way it was before in 2019. “With the pandemic pushing office employees to work from home, the past year saw a sharp 30% increase in corporate spending on tech hardware, and we anticipate higher spending on digital services, as the economy recovers and companies adjust to a “new normal,” Daniel Skelly said.
Further, Katy Huberty, equity analyst at Morgan Stanley, sees early evidence of business-model shifts that anticipate permanent changes in consumer preferences and accelerating trends in e-commerce and e-services.
Millennial investors on the rise
During the pandemic, Wall Street has witnessed increased participation from young investors. “Currently, only 6.5% of Millennials’ assets are in equities, similar to the 6.0% allocation Boomers had at age 40.1 In subsequent years, the Boomers’ allocation to equities grew to over 25%,1 implying further stock-market inflows may be in store,” Skelly said.