Investment Winners and Losers from AI and Automation

Can Automation and Technology Create More Jobs than It Destroys? Anyone fearing the “rise of robots” and the effect on the economy has good cause for feeling apprehensive. It is easy to envision a scenario where robots, automation, and Artificial Intelligence (AI) increasingly perform functions once handled by humans, wiping out entire industries and professions in the process. The pressing question for investors becomes: what sectors, industries, and businesses are likely to benefit the most—versus those that are likely to be hurt the most? An entire investment thesis could be based around answering this question. For investors, the implication is that company analysis should give full consideration to how automation and Artificial Intelligence (AI) may alter the company’s growth and competitiveness. Doing this type of research may very well inform you whether company can survive and thrive in the years ahead. The ecommerce revolution is a prime example. For investors who actively monitored the shifting landscape away from brick-and-mortar stores and towards shopping online, an investment approach could have been to sell big box retailers while looking to buy surging online retailers, like Amazon. In the last five years, Sears Holdings has plummeted from around $35 / share to now trading around $3. Meanwhile, Amazon has surged from around $260 / share to currently trading over $1,400 / share. Monitoring these trends in technology matter. The High Level View On one hand, the ‘rise of the robot’ could mean great things for corporations, consumers, and investors. It could lower the cost of labor, increase profit margins, lower the cost of goods sold, drive up incomes for skilled laborers, create new jobs in engineering and customer service, and higher earnings – which could mean higher stock prices. Indeed, from an investor standpoint, cheaper goods for consumers and higher profits for corporations both register as positives for stock prices. On the other hand, robots may replace the need for humans in many ways, resulting in lost jobs. Warehouse workers, mechanics, and truck drivers could become extinct in the next 10 – 20 years, and who knows where else a robot can step-in to perform a task once performed by a human. Companies that are most affected by these changes, and that cannot adapt quickly enough, may not be smart to own in a portfolio. From an economic standpoint, if job losses occur at a faster pace than the training needed to move displaced workers to new jobs, it could lead to a soaring unemployment rate and put strain on government debt and interest rates. This would register as a macroeconomic negative for the economy and stocks. What History Tells Us History offers us good context that we can use to deconstruct the automation issue. Economic anxieties about the impact of automation and technological innovation go all the way back to the 1500’s. In 1589, Queen Elizabeth I refused to grant the inventor of a mechanical knitting machine a patent, because she was worried that doing so would put too many manual knitters out of work. Fast forward to the 1970s, when one of the biggest fears in the banking industry was that the ATM machine was going to replace the need for bank tellers. The reality ended up being much different, and better, than many feared: bank tellers expanded their duties into “relationship banking,” and could then focus more time and attention on selling mortgages, credit cards, and other financial products. From 1988 to 2004, total bank branches soared by 43%. In this case as in many others, automation created more jobs than it destroyed. Over time, the U.S. economy has evolved from an agricultural economy, to an industrialized economy, to a service and technology-oriented economy. Throughout that evolution, jobs have been destroyed, but new jobs have risen from the ashes in greater numbers. Automation commonly creates more, and better-paying, jobs than it destroys. The reason has been – and is – because companies to date have not used automation simply to produce more of the same item more cheaply. Companies use the breakthroughs to develop new products and services, to grow, and in many cases to hire more people. These are the companies investors want to seek out. The ‘ecommerce’ revolution again serves as a prime example. The closures of brick-and-mortar stores like J.C. Penney’s and Sears give the impression that Amazon’s model is destroying businesses and jobs. Indeed, an estimated 140,000 jobs in the brick-and-mortar space have disappeared over the last decade*. That fact alone makes the easy conclusion that automation and technology were harmful. But if you look at that fact in context, the story changes considerably. In the same decade that 140,000 brick-and-mortar jobs were lost, warehousing jobs have soared by 274,000 and the total ecommerce employment has grown to 401,000. Not only that, but ecommerce jobs tend to pay better (on average 31% more), and employees often receive benefits such as tuition aid, shares of stock, and comprehensive health care*. The same 140,000 who lost their jobs may not have been ones to gain jobs in the process, and that can be a painful reality of economic transitions. But the macroeconomic reality is that automation and technology often create and destroy jobs simultaneously, with the net positive impact on the economy. Bottom Line for Investors The wave of automation, technological innovation, and robotics will almost certainly inflict pain on many segments of the economy. Technological changes by their very nature can be highly disruptive, and they can cause a great deal of job loss in pockets of the economy that are most affected. As investors, though, it is not our job to figure out how to make this transition painless – it’s our job to distinguish between the economic winners and the losers that emerge in the transition. That takes a great deal of research and careful consideration, and it’s what we do every day. In today’s technology-driven economy, Zacks Investment Management has innovated and optimized investment management with new financial technologies and now offers an actively managed robo advisor that: - Uses technology to maximize investing efficiencies through automated asset allocation, portfolio rebalancing and tax-loss harvesting. - Invests exclusively with ETFs - Uses technology to recommend the appropriate mix of equities and bond ETFs to help achieve your investing goal and specific risk tolerance. - Lowers fees and expenses For further information, we recommend you read our report: The Savvy Investor’s Guide [Get your copy of The Savvy Investor’s Guide]( *Source: © Zacks Investment Management | [Unsubscribe]( DISCLOSURE Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. 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