To position yourself for more gains this decade, you must first understand what’s behind the growing wealth divide
… the economy is humming, we’ve got nearly full employment, and the stock market keeps rising.
Yet … the net worth of America’s lower and middle classes keeps plummeting.
As one of my wealthy friends said recently, it’s as if a giant drawbridge is dividing our country in half.
That comes from Eric Fry, describing the intensifying separation between the “haves” and “have nots” in the United States.
We began featuring Eric’s work on this topic in yesterday’s Digest. If you missed it, here’s Eric with a brief synopsis:
On one side are the rich — who fully understand what’s happening and are taking full advantage of the situation.
On the other side … well … there’s everyone else.
I call this wealth gap “The Technochasm.”
So, what is it, exactly, that the rich are fully understanding, which is fueling this wealth gap?
In short, it’s the awareness that investing alongside technology is the key to wealth-creation in our world today.
Given this reality, a highly-select group of business owners, key employees, and investors are enjoying huge financial returns from tech … distancing themselves from everyone else — even from “average” market investors.
… and it’s going to continue.
As investors, we can either jump on board, or find ourselves on the wrong side of the Technochasm.
So, in today’s Digest, let’s pick back up with what will be one of the most influential issues affecting our country — and your wealth — over this next decade.
***The great economic sifting mechanism
You could separate Americans into three broad groups …
1. The huge percentage of Americans who don’t invest.
2. The Americans who do invest, but have their money mostly allocated to traditional sectors. If they do own “tech,” it’s not a substantial percentage.
3. The small, select group of owners, employees, and investors who have a significant allocation to technology, and are therefore accruing the majority of tech’s gains.
So, how distinct are these groups?
Well, a September report from Gallup found that only 55% of Americans are invested in equities. So, 45% of the nation doesn’t own a single stock.
It’s a reasonable assumption that this 45% who don’t invest likely earn less money, working in lower-salaried positions.
For this group, the unfortunate reality is that not only are they not benefiting from tech’s wealth creation, they’re at risk of being victimized by it.
A study by the Brookings Institution found that a quarter of U.S. jobs will be severely disrupted as artificial intelligence continues to accelerate.
The report says that roughly 36 million American jobs with “high exposure” to automation could soon be performed by machines.
Here’s MarketWatch, expanding on this idea:
The changes will hit hardest in smaller cities, especially those in the heartland and Rust Belt and in states like Indiana and Kentucky, according to the report by the Washington think tank.
They will also disproportionately affect the younger workers who dominate food services and other industries at highest risk for automation.
Now, what about the second group, the 55% of Americans who do invest?
The bull market over this last decade has been great for them. Having money invested in the S&P for the last 10 years has brought 200%+ returns, as you can see below.
Obviously, this alone is a huge separator between the 55% of the nation that invests versus the 45% that doesn’t.
***But now, let’s get more granular, because within the group of “those who invest,” there’s a massive delineation between our third group, “tech investors,” and everyone else
As our first illustration, take XLK — it’s the SPDR Technology Sector ETF. It holds tech heavyweights including Microsoft, Apple, Intel, and Cisco, to name a few.
Here’s how XLK has done over the past decade, compared to the average S&P investor.
More than double the return. And remember, this is from an ETF — so a broad basket of stocks, many of which probably underperform.
If we look at some of the top tech names, the individual gains are staggering.
As 2019 closed, here were the 10-year returns for a select few technology-related companies …
Netflix — 3,767%
Broadcom (semiconductors) — 1,919%
Amazon — 1,209%
Nvidia (semiconductors) — 1,117%
Apple — 899%
***The weakness hiding underneath the broad market gains
The challenge is that many investors aren’t significantly exposed to these tech gains, and never have been. Their portfolios were (and are) filled with many other sectors … some of which actually destroyed wealth.
Take energy.
For decades, energy stocks have served as the rock-solid pillars of American portfolios.
For example, as Eric noted in his recent update to subscribers, in 1980 the top five largest companies in the S&P included three energy-related companies — Exxon, Standard Oil of Indiana, and Schlumberger (the other two were IBM and AT&T).
Even as recently as the year 2000, Exxon was still the second largest company in the S&P 500 (behind General Electric), with a market cap of $302 billion at the time.
But if you had blindly remained heavily exposed to energy in the years since, your portfolio has suffered.
Take the ETF, XLE, which is the Energy Select Sector SPDR Fund. It holds oil heavyweights including Exxon, Chevron, ConocoPhillips, Schlumberger, Occidental, and Valero to name a few.
Below, we compare XLK (the broad tech sector ETF) with XLE over the past 10 years. This one chart is a great illustration of why the wealth-gap is widening, even amongst investors.
This differential is even more pronounced if we look at returns over the last 5 years.
Below, you’ll see how the average tech investor is up nearly 200%, while the average energy investor has not only missed these gains, he watched his investment capital gutted by 31%.
This is the great sifting mechanism of technology at work … the Technochasm.
***This division is going to continue — and intensify
The reason why is simple — tech makes our lives easier, so we’re going to continue buying it, subscribing to it, and using it … fueling tech profits for years to come.
Even those Americans who aren’t invested in tech will open their wallets for its good and services, therein rewarding tech investors.
If you want a simple illustration of this, look at what could be argued as the most influential tech product of the past decade …
Smartphones.
Think about how you used your phone “then” versus “now” … all the apps you currently use daily … all the related conveniences you take for granted that were never imagined a decade ago.
Pew Research conducted a study on cell phones and found that today, 96% of Americans own a cell phone of some kind. Of that, the share of Americans that own smartphones is 81%. That’s up from just 35% in Pew Research Center’s first survey on smartphone ownership back in 2011.
Now, with these ownership numbers, it’s a statistical certainty that a great many Americans who don’t own a single tech stock are buying these tech products. So, their money is flowing out of their wallet and into the coffers of, say, Apple, Micron, and Qualcomm, just as a few examples.
In fact, take a guess here …
According to Pew Research, what percentage of U.S. adults who make less than $30K a year own a smartphone?
Not just any ‘ole cell phone, but a fancy smartphone?
71%.
If we bump that income level to between $50,000 – $74,999, the smartphone ownership percentage leaps to 90%.
As smartphone technology expands to include holograms, mind-controlled menu navigation, and over-air-battery charging, do you think people will buy fewer or more of these amazing products?
Call it what you want, but this is — and will continue to be — nothing short of a wealth transfer from the broad public to the select few individuals who have aligned themselves with tech profits.
This is the Technochasm at work.
Here’s Eric:
In the past five years …
* Alphabet is up 179%.
* Amazon is up 459%.
* Apple is up 195%.
* Facebook is up 185%.
* Microsoft is up 387%.
That demolishes the S&P 500’s 80% return over the same stretch.
If you’ve ever thought that technology innovation has slowed, you need to think again.
Technology is still the engine that drives our economy and the stock market.
That’s a simple truth … but it also is the key to what I believe is the biggest investment opportunity in the world today.
Over the course of this decade — from an investment perspective — there will be “elite tech” returns and then “everything else.” Will you be positioned for it?
To learn more about Eric’s research on this issue, click here.
We’ll be back tomorrow to tackle another angle on the Technochasm.
Have a good evening,
Jeff Remsburg
