Several recent developments highlight the growing influence of technological disruption in the economy: Ford Motor Company just replaced its CEO (who served for only three years) with the head of its “smart mobility” unit in response to not only a weakened share price and competitive pressure, but the looming threat of self-driving cars. In addition, department store chains saw dismal first-quarter earnings as the mix of consumer purchases continued to swing to digital platforms—this as Amazon.com celebrated the 20th anniversary of its IPO, with growth over that time coming at the expense of traditional retailers.
It used to be that technology companies largely kept to their own turf, competing with each other to provide products and services to traditional businesses. But those lines are blurring, as they are able to step in with innovative solutions that often change industries they had once only supplied. Meanwhile, the traditional companies have sought to adapt, engineering so much change that most are now in the “technology” business.
The Road Ahead
The automotive industry is the current poster child for this disruption. Various Silicon Valley players are road-testing self-driving cars, which is coinciding with improvement in electrically powered engines and the increased popularity of ride sharing technology. This is creating intense challenges for more traditional producers, both in terms of innovation and long-term demand. However, the latter group does have a decided advantage in their ability to manage a complex manufacturing process, and have resources to build out new capabilities through acquisition and innovation. The trick, to a large degree, is one of successful execution and smart strategic decision-making in traditional and next-generation transportation.
The question of who will “win” this race is still up in the air. The long-term implications, however, are stark. In the U.S., truck driver is the most common job in 29 states.1 What happens to those jobs when autonomous driving technology is perfected? Furthermore, the current utilization of the installed base of automobiles (the time they are actually being driven versus sitting in a garage) is approximately 3%. What happens to car sales in the future when ride sharing combines with autonomous driving?
As for retail, electronic purchases were once a niche market, but with the ubiquity of computers and, later, mobile devices, the convenience of buying electronically overcame qualms that consumers had about security and service, which have gradually improved. Moreover, it’s hard to argue with the value of locating goods online for less, almost instantly. Many retailers have overbuilt over the past several years, which has contributed to the closing of thousands of individual stores and some high-profile bankruptcies, and in turn has pressured shopping malls across the country. Some segments are doing reasonably well—luxury brands, for example. There’s probably a viable equilibrium between “bricks and mortar,” which is still preferred by many shoppers, and digital presence, but it’s a hard one to navigate and the landscape is rapidly changing.
There are many other examples of disruptive change. In energy, the U.S. shale industry was surprisingly resilient during the oil price weakness of 2014-2016, as technological innovation allowed it to significantly reduce the cost of drilling from existing wells. The trend appears to have contributed to OPEC’s decision to cut back on production, which has helped push oil prices back to more profitable levels. Limited oil discoveries have prompted the International Energy Association to anticipate a supply shortage by 2020, but in subsequent decades, some oil companies expect an eventual demand peak tied to increased use of alternative energy.
One can look at virtually any other sector and see the broad and accelerating influence of technology: the increased viability of three-dimensional printers, the ubiquity of sensor-driven products, the evolution of the travel industry, the sea change in video, audio and telecom, the transformation of health care diagnosis and treatment, the potential impact of artificial intelligence on retail and other sectors. There appears no end in sight.
For equity investors, it’s easy to get caught up in these developments but also important to distinguish between the “story” of a given stock or industry and the potential reality. Solar energy was widely touted in the 1970s but has only become economically viable in recent years. Certain technologies never catch on, and often early entrants fade when they are unable to execute on even the best ideas.
At the same time, rapid and pervasive advances make it virtually impossible for investors to avoid technology, especially if they want to participate in the faster growing segments of the economy. There is no substitute for thorough research and a disciplined process, as well as diversification, in seeking to both capitalize on these trends and limit exposure to potential downside. Moreover, it’s key to look beneath quantitative factors for fundamental realities driving a given business. Many retail stocks, for example, show up when quantitative screens are used to pick “cheap” stocks. But those stocks are often cheap for a good reason.
Yes, innovation is disruptive and it can destroy industries and companies. But it also creates great opportunity if you understand the fundamental trends driving these changes. That’s what our portfolio managers seek to do.
In Case You Missed It
- U.S. New Home Sales: -11.4% to SAAR of 569,000 units in April
- U.S. Existing Home Sales: -2.3% to SAAR of 5.57 million units in April
- FOMC Minutes: Federal Reserve officials believe that it would “soon be appropriate” for another rate increase
- U.S. Durable Goods Orders: -0.67% in April (excluding transportation, durable goods orders decreased 0.39%)
- U.S. 1Q 2017 GDP (second estimate): +1.2% annualized rate
What to Watch For
- Tuesday, 5/30:
- U.S. Personal Income & Outlays
- S&P Case-Shiller Home Prices Index
- Thursday, 6/1:
- ISM Manufacturing Index
- Friday, 6/2:
- U.S. Employment Report
Statistics on the Current State of the Market – as of May 26, 2017
|S&P 500 Index||1.5%||1.5%||8.8%|
|Russell 1000 Index||1.4%||1.4%||8.7%|
|Russell 1000 Growth Index||1.9%||2.5%||14.2%|
|Russell 1000 Value Index||0.9%||0.3%||3.4%|
|Russell 2000 Index||1.1%||-1.2%||2.3%|
|MSCI World Index||1.0%||2.2%||10.5%|
|MSCI EAFE Index||0.2%||3.5%||14.0%|
|MSCI Emerging Markets Index||2.2%||4.1%||18.7%|
|STOXX Europe 600||0.0%||4.5%||16.8%|
|FTSE 100 Index||1.1%||5.3%||7.7%|
|CSI 300 Index||2.3%||1.4%||5.4%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.0%||0.1%||0.4%|
|Citigroup 10-Year Treasury Index||0.0%||0.4%||2.4%|
|Bloomberg Barclays Municipal Bond Index||0.4%||1.3%||3.6%|
|Bloomberg Barclays US Aggregate Bond Index||0.0%||0.5%||2.1%|
|Bloomberg Barclays Global Aggregate Index||0.1%||1.1%||4.1%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.1%||0.4%||1.6%|
|BofA Merrill Lynch U.S. High Yield Index||0.3%||0.8%||4.7%|
|BofA Merrill Lynch Global High Yield Index||0.3%||1.0%||5.7%|
|JP Morgan EMBI Global Diversified Index||0.5%||0.8%||6.3%|
|JP Morgan GBI-EM Global Diversified Index||1.2%||2.0%||9.9%|
|U.S. Dollar per British Pounds||-1.8%||-1.1%||3.5%|
|U.S. Dollar per Euro||-0.1%||2.7%||6.0%|
|U.S. Dollar per Japanese Yen||0.3%||0.2%||4.8%|
|Real & Alternative Assets|
|Alerian MLP Index||-1.2%||-2.6%||0.0%|
|FTSE EPRA/NAREIT North America Index||0.3%||-0.4%||-0.1%|
|FTSE EPRA/NAREIT Global Index||0.9%||1.3%||6.1%|
|Bloomberg Commodity Index||-0.8%||0.1%||-3.7%|
|Gold (NYM $/ozt) Continuous Future||1.2%||0.0%||10.1%|
|Crude Oil (NYM $/bbl) Continuous Future||-1.7%||1.0%||-7.3%|
Source: FactSet, Neuberger Berman.