What Investors Could Expect From the Current Super Cycle

In the last two parts of our super cycle series, we’ve covered why investors should consider longer-term economic financial trends and took a look at the past five major super cycles that have disrupted and changed the world.

In the third and final part of the series, we’ll be exploring the current super cycle, coined as the “Post-Modern Cycle” by Goldman Sachs Research’s Chief Global Equity Strategist Peter Oppenheimer.

Oppenheimer found the emerging cycle started around the 2020s with the pandemic, which has subsequently set the world on course for the next long-term structural change.

What is the Post-Modern Cycle?

The pandemic triggered a brief bear market where US equities fell 34% in total real terms, but the rebound was strong. In 2021, the S&P 500 rose by 27%, ranking in the 85th percentile of all annual returns since 1962. Technology also dominates this cycle.

Oppenheimer believes interest rates will come down in the short term but not in the levels seen before the financial crisis, meaning, the cost of capital will remain higher.

The Post-Modern Cycle is also witnessing a shift in world trade with moves towards regionalization driven by geopolitical tensions and decarbonization. Instead of the deregulation and increased world trade we saw from the last 20 years, there’s increasing regulation, higher tariffs, and more protectionism.

Government spending and deficits are on the rise due to more subsidies and tax breaks for decarbonization that could lead to a higher level of long-term interest, Oppenheimer noted. Policy priorities have also resulted in higher defense spending. All this occurs against the backdrop of aging demographics.

The emergence of inflation and higher interest rates ushers this period into a new market phase, which Oppenheimer believes will most likely be marked by higher cost of capital and elevated interest rates. This is a structural growth period that may see lower expansion of markets and aggregate growth due to slowing world trade.

Where are the market opportunities now?

Oppenheimer believes investors can still find opportunities but ought to be selective in searching for more alpha than beta – the differences within and across markets – rather than buying and holding equities while expecting valuations to drive returns.

He emphasized again the importance of looking beyond the urgent issues of interest rates and growth and noting how the world is changing in fundamental ways – from supply chain challenges to the changing globalization patterns and resource scarcity.

Oppenheimer said there are exciting opportunities in the developments of technology and the move towards a decarbonized economy. Artificial intelligence (AI) is likely to drive growth opportunities in the technology sector and beyond, the requirement for significant increases in electrical power and capital expenditures to maintain the utilities could revive some of the slowing sectors.

While there will be losers due to the developments, there will likely be many more winners, said Oppenheimer.

The parallel nostalgia economy

It’s also worth noting that a parallel economy has been concurrently emerging alongside technological advancements. People often look at technological changes as being disruptive, but there’s also a psychological force towards nostalgia as the technology and digital world becomes more dominant in our lives. In other words, the things technology seeks to replace need not be obsolete.

For instance, Oppenheimer pointed to the 19th century when railroads were built. People assumed that they wouldn’t need as many horses until they faced the last-mile problem – how do we get from the train station to home?

It’s not just railroads. Oppenheimer believes this “hankering for the past” is accelerating. Record stores are back in big cities, selling vinyl again; creative arts to programs for baking, ball room dancing and clothes making are on the rise; and millennials are willing to shop for secondhand and used clothes. He believes these behaviors give rise to the nostalgia economy, even as our lives become more infused with technology.

It remains to be seen how much weight the nostalgia economy may have on broader economic growth, as the new Post-Modern Cycle runs its course.