Secular trends refer to significant movements or changes in a direction that continue regardless of short-term market variations or economic shifts over years or decades, and are typically influenced by fundamental alterations, such as technological progressions, demographics, changes in consumer preferences, or government or monetary policy. Let’s look at three examples of megatrends.

A Meteoric Innovation Shift

Legendary investor Warren Buffett once shared a simple, but incredible piece of wisdom:

“For 240 years it’s been a terrible mistake to bet against America. The babies being born in America today are the luckiest crop in history.”

Buffett’s words may seem obvious, but they are profound when you consider how much progress has been made in the U.S. and around the world in just the past few centuries.

Though a century or a few centuries may seem like an eternity, it is but a moment in mankind’s history.

Railroads were not operational until 1825. Electricity was not prevalent in most homes until the early 20th century.

In my lifetime, the innovations of the internet and the smartphone changed the world profoundly to the point that teenagers today would feel alien without them.

Major innovations make life better and humans inherently want better lives. So how does this relate to the stock market?

Innovative companies, like the internet stocks of the late 1990s, grow their earnings rapidly and consistently, allowing investors to exploit these fundamental shifts and profit handsomely.

Government Policy

Another secular trend maker or breaker can be government policy and central bank policy.

Argentina is an excellent example of how the government can impact economies and markets.

Until 1930, Argentina was the economic jewel of Latin America. The country benefited from its abundant natural resources, such as fossil fuels, beef (considered the best in the world), and minerals (including gold, copper, and lithium).

You may be surprised when I tell you that Argentina was one of the world’s ten wealthiest countries per capita in the early 1900s, and Buenos Aires, Argentina’s capital city, was dubbed “The Paris Latin America” due to its magnificent architecture.

Unfortunately, the economic renaissance would not last. By the mid-1900s, Argentina adopted socialist policies, and government officials engaged in fiscal recklessness, leading to chronic hyperinflation and economic disasters.

In late 2023, Argentina made a 180-degree turn and elected economist Javier Milei. Though Argentina is not out of the woods, Milei has delivered the country’s first economic surplus in decades, and the Argentine stock market is up nearly 60%.

The Argentina case study proves why investors should be cognizant of the government’s impact on the economy and the stock market.

Demographic Shifts

Demographics refers to the statistical attributes of populations (such as age or income) used specifically to identify trends.

No greater example exists of the impact of demographic shifts on markets than Japan.

The Nikkei, Japan’s stock market, topped on December 29th, 1989 due to an asset bubble.

After years of prosperity, overvalued stocks came back to Earth. However, what would happen next was a bear market for the ages.

Japan’s stock market did not reach fresh all-time highs for more than three decades due to low economic growth, deflation, and most importantly, a population collapse.

Secular Shifts are Like Cruise Ships

These secular trends are resilient to temporary disruptions or minor market fluctuations, offering constant and lasting growth.

A fantastic metaphor for investors to use when thinking of these megatrends is trying to turn a cruise ship.

Secular trends, like cruise ships, cannot pivot at a moment’s notice. Instead, these trends persist, making them particularly important for investors like you to identify, regardless of time frame or strategy.

Trend #1: China, a Monumental Policy Shift

Like the Japan and Argentina examples, China’s economy and stock market have languished for years amid anti-business policy and the COVID-19 pandemic.

The iShares China LC ETF (FXI), a proxy for large-cap Chinese stocks, reached a high of $73 in 2007. By January 2024, it had fallen to as low as $20.

Despite the negativity around China, the investing picture completely flipped in late September after the Chinese government announced a sweeping, larger-than-expected stimulus package and lower interest rates.

Clearly, the government’s agenda is to support the economy, inject liquidity into the system, and become more business friendly.

FXI jumped 10% on the news, and trading volume swelled 399% above the 50-day average. The combination of insane demand and drastic policy change parallels past historical trend changes.

Trend #2: Nuclear Will Power the AI Revolution

OpenAI, the company behind the wildly popular ChatGPT chatbot, is among the fastest startups to reach the $150 billion valuation milestone.

While ChatGPT and other large language models (LLMs) like Alphabet’s (GOOGL) Gemini have attained early success, that success isn’t without its challenges.

Data centers, which are needed to “train” LLMs, require 10-50 times the power of a typical commercial space.

As it is, U.S. power grid issues and frustrating outages have increased recently. To make matters worse, data center energy consumption is slated to compound by 10% over the next five years.

Though growing energy needs are a headache for AI-related companies, it is an opportunity for utility and nuclear companies like Constellation Energy (CEG).

In late September, CEG shares powered higher after Microsoft (MSFT), OpenAI’s largest investor, inked a 20-year deal with the company to re-open the infamous “Three Mile Island” and provide energy derived from the nuclear plant.

Pew Research shows that most Americans support more nuclear power in the U.S. and politicians on both sides of the aisle are warming up to it.

The enormous demand, a high-profile investment, and widespread support are ingredients for a multi-year megatrend.

Trend #3: Bitcoin’s Moment

Bitcoin is the top-performing asset since its inception in 2009.

That said, trends can last longer than most investors anticipate, and Bitcoin will likely be no exception.

Three dynamic changes in the Bitcoin industry will propel the next wave of the bull market:

1) Access: Earlier this year, BlackRock’s (BLK) iShares Bitcoin Trust (IBIT) opened up the Bitcoin market to many retail investors and became the most successful ETF launch ever. Beyond retail investors, Registered Investment Advisors (RIA) and other institutional investors have a bridge to allocate portfolios to the world’s largest cryptocurrency. More recently, news broke that the Securities and Exchange Commission (SEC) approved options trading for the IBIT ETF. As investors who missed the initial Bitcoin bull market look to cash in, more comprehensive access will drive prices higher in the long run.

2) Rampant Government Spending: Government spending leads to inflation. The U.S. has only produced a budget surplus four times in the past 50 years and debt has reached the nosebleed level of $35 trillion. With the interest on the debt swelling and government spending unlikely to slow, investors will turn to Bitcoin, which is deflationary (limited supply), and has a built-in monetary protocol.

3) FTX Repayments:  A massive fraud led to the collapse and subsequent bankruptcy of the FTX crypto exchange in 2022. After a brutal “crypto winter,” FTX clients could not withdraw funds, and many feared they would all be lost. Fortunately, in a twist of fate, Bitcoin and most crypto assets have appreciated handsomely since the 2022 FTX collapse, and clients are expected to get their funds paid back in total, with interest. Former FTX clients will receive approximately $16 billion in funds as soon as December. As FTX victims (who likely assumed their funds were gone for good) receive repayment, it could spark a rally in Bitcoin as some of them reinvest their funds.

Putting It All Together

Megatrends and long-term waves can offer investors lucrative opportunities. In this article, we’ve touched on a few that savvy investors will likely key in on. And the good news is, our expert-led portfolio recommendation services cover a number of strategies, grounded in Zacks Rank fundamentals, that can lead you to the top stocks to take full advantage.

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