Creative Destruction

This article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA

photo: smartwatch on man's wrist

Creative Destruction was a term coined by Austrian Economist Joseph Schumpeter in 1942.  This term essentially describes the dismantling of current processes and procedures to make room for improved methodologies.

An example of Creative Destruction is smart watches replacing wristwatches.

Regrettably for Mr. Schumpeter, physical destruction and death was very easy to see.  It was all around him. World War II started in 1939.  Fortunately, it finally came to a brutal end in 1945. 

Recent History

The Pandemic certainly caused massive destruction. The number of people who have died is staggering. The World Health Organization has confirmed deaths of almost 7 million by July, 2023. 1)  The doctors and the nurses are our heroes.  They were, and still are, on the front lines every day under immense pressure.

Some of the industries hit very hard were:

  • Airlines
  • Energy
  • Gaming
  • Hospitality
  • Leisure

The list of course, went on.

At the height of the Pandemic, the S&P 500 Index declined by 23.55%. 2)  Unemployment soared to 13% in the second quarter of 2020. 3)  Oil dropped to twenty-year lows.  Social (actually physical) distancing and quarantining were the new normal.

The Federal Government’s response to the Pandemic was unprecedented.  $2 Trillion (with a T) in relief was granted through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  They extended unemployment benefits and gave small businesses loans and grants.

There is nothing to compare the Pandemic to based on anything in my lifetime.  The last major economic setback was The Great Recession of 2007-2009, which was the longest recession since World War II. Oh, and it was not much fun. The S&P 500 Index was down 57% from its highs. 4) No shortage of financial destruction there too, but no loss of life because of it.  Prior to that, we had the meltdown in 2000. From peak to trough the technology heavy NASDAQ lost 78%. 5) Yikes!

The Way Forward

We are, slowly, working our way forward.  It might take longer and be more painful, but eventually we will get there.

What is it going to look like going forward?  It is hard to say.  Employers are now demanding / asking / recommending/ suggesting/ begging employees to come back to the office.  Will more folks continue to work from home or the hybrid model?  As we say a lot around here, “we’ll see.”

The work from home / hybrid model is one outcome from the Pandemic and it has been very brutal on commercial real estate.  There are lots of vacant buildings. This is having a very negative economic effect on major cities like New York. 

Employers having to beg employees to come back to the office is primarily due to the steep decline in the unemployment rate.  It hit a high of 13% at the height of the Pandemic.  It has currently settled to under 4%. This was a result of all of the Government stimulus and the Great Resignation.

The Great Resignation is where record numbers of workers (47 million in 2021 and 38 million in 2022) voluntarily resigned from their jobs since the beginning of the Pandemic. 6)  That’s a lot of people. Roughly half said child care issues were the primary driver of this. 7).   However, it shouldn’t be called the Great Resignation. It should be called the Great Sabbatical.  It’s hard to believe so many folks can just resign.  Stimulus checks are over. Extended unemployment benefits are out. Income Tax refunds have been lower. The pause on Student Loan payments will be over soon.  I’m just left with one simple question:

Where is the money coming from for folks that resigned to pay their bills?

That’s why it’s the Great Sabbatical.  It’s a rest or a break from work for an extended period of time.  In other words, many of these folks will return to the workforce once they realize there is no more mailbox money.

Will education continue to migrate to more and more online?  Odds are yes, but again, we will see.  I suspect many parents might be thinking long and hard about writing those very large tuition checks or signing on the dotted line for student loans. This is particularly true now that the Supreme Court struck down President Biden’s Student Loan forgiveness plan.

By the way, the student loans would not really be forgiven.  The obligation to pay would merely be transferred from the students to the taxpayers.  

Additionally, many folks are just finding out that Community Colleges are free for eligible students. Repeat, they are free.

Just before the start of the Pandemic, we had just written about The Roaring Twenties 2.0.  We were, to say the least, off to an auspicious start.  However, the last line of our post said it best:

Strap yourself in and enjoy the ride!

When we wrote that, we had no idea what we were in for shortly after that.

The Creative Side

Throughout all of mankind, tons of stuff has been created.  Here is very short recent list:

  • Computers
  • The Internet
  • Smart Phones
  • Artificial Intelligence (AI)

For this short list, the winner would appear to go to the late Steve Jobs and Apple (APPL) with the invention of the iPhone. Or should it go to Al Gore who invented the Internet?  I’ll let you decide.

Capital is being reallocated and, big surprise, it’s flowing to the Technology Sector.  The Technology Sector made up over 28.2% of the S&P 500 Index as of June 30, 2023.

The leader of the pack for AI has been ChatGPT. It set a record for fastest user growth when it reached 100 million users two months after starting. 

Be on high alert when you hear, “It’s different this time.” Right. Some recent examples of ‘the next best thing’ that haven’t quite worked out yet include:

  • The Metaverse
  • 3 – D Printing
  • SPAC’s
  • Crypto

Be very cautious about investing here.  The hype around AI has been, well, unbelievable.  The current poster child for AI is Nvidia (NVDA).  This is currently selling for 30 time’s sales.  Not 30 times earnings:

 30 times sales!

 As Buzz Lightyear in the movie Toy Story said, “To infinity and beyond.” It may take to infinity and beyond to get paid back on this one when you are paying 30 times sales!


Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.

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