When people think about investments that are focused on innovation, they typically think of different areas within Technology. Some question whether it is too late to invest in these sectors, given the high valuations and prices.

We believe investors should look at the potential return profile of these innovative sectors relative to where they think it sits on an “S-curve”. The S-curve illustrates the evolutionary adoption rate of a product or service. At the bottom of the S curve is when the new technology has been created, however the adoption rate has been flat. This might be due to high prices or a lack of the necessary infrastructure that could facilitate higher adoption. Then, there are early adopters. These are the individuals that are quick to try the newest “gadgets”. Then gradually, the technology hits an inflection point, where the adoption rate suddenly takes off and confirms that this technology is the next big thing. The next phase shows rapid growth, where enough consumers adopt this technology, thereby driving down costs, and making the new product even more affordable to the majority. Eventually, the adoption rate will hit a top, and as those who were initially-reluctant begin to adopt the technology, the growth rate will mature and slow down.

Influential writer, Malcolm Gladwell, has written about this phenomenon in his best-selling book, “The Tipping Point”. According to Gladwell, “the tipping point is that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire”. He examines how even small actions, when combined with the perfect circumstances - the right people, being at the right place, and at the right time – can create a tipping point for a product. What has been observed is that the adoption rates of many technologies typically speed up during crises. The current Covid crisis is a clear example as people and businesses have been forced to adapt to new technologies in order to survive. Today, we can think of many different areas of innovation or themes of investing that may be heading towards a “tipping point”. These include: electric cars, alternative energy, online education, fintech, telehealth, gene editing, and sustainable (ESG) investments.

Beyond Covid-19, what else could serve as a catalyst to push adoption rates to their tipping point? Thomas Lee, Head of Research at Fundstrat, believes a structural labor shortage could create a parabolic rise in technology and adoption rates. Lee makes the following observation “if the world has population growth exceeding labor supply, this output gap/ worker shortage is solved by [an] increasing reliance on capital-based labor, aka Technology”. In the chart below, investors can see that since the 1930’s , the periods of US labor shortage has led to massive gains in Technology relative to the S&P500. The US fell into a structural labor shortage in 2015 and due to demographic trends, Lee expects this shortage could last until 2047 and could cause Technology to become a 50% weight within the S&P500 index.

Although future expectations for technology are lofty, market volatility can test the nerves of investors. We still believe rebalancing and diversification are key towards building a long term portfolio. If you have a long-term investment horizon, you may want to discuss with your advisor the suitability of including some of the technology themes mentioned above.