The Evolving Tech Story & Exponential Change
On April 27, 2022, I spoke with Charles Payne on Fox Business on what is going on with technology shares.
What is the deal with Tech getting banged around?
Markets are going through a reset, and investors are forced to rethink valuations as we face a truly unprecedented set of conditions:
The multi-decade-high pace of inflation is hitting as the economy slows.
The escalating war in Ukraine affects major economic inputs (energy) and value chains.
The shutdowns in China cut both supply and demand at a globally meaningful level.
The USD dollar is surging with DXY looking like it is about to break out above the March 2020 peak of 103.
The Japanese yen is falling hard.
First quarter GDP comes out tomorrow and is expected to be around 1%, which is stall speed. When the Fed starts a rate hike cycle, GDP is typically over 3%.
The yield curve (difference between long and short-term rates) is flatter (meaning they are closer) than we normally see at the start of a rate hike cycle.
This will be the FIRST time since 1987 that the Fed has started a cycle with the major equity market indices below their 200-day moving averages.
When we combine interest rate hikes with tapering, this rate hike cycle translates into around 450 basis points of hikes. We haven’t seen anything of that order of magnitude since Volker, to whom Powell now compares himself.
This translates into a roughly 2.5 to 3 percentage point drag on GDP in 2022 and a 5.5 percentage point drag in 2023.
Makes sense to see a rethink on valuation.
Yesterday, the S&P 500 saw its second-largest decline in the past year, and the Nasdaq Composite took its worst tumble since September 2020. Both the Nasdaq and the Russell 2000 have undercut their March lows—a former support level—and the S&P 500 is hovering right around its closing March low.
S&P 500 is set for its worst month since March 2020, but back then, we had fiscal & monetary tailwinds in our future, today they have become headwinds
INSIGHTS FROM EARNINGS SEASON
We are looking not just at the wave of adverse news that has come out of the tech mega-caps but also at cyclical bellwethers like UPS, G.E., and 3M, which all delivered downbeat macro assessments, and their stocks got walloped in response.
This is another sign that we are in a totally different environment.
Charles Schwab has reported that it now is holding more than 2x the share of its investment portfolios in cash — 15%-16% versus the more typical 5%-7% — as a liquidity buffer and avoid forced sales in the likely event that the market takes another leg down.
REPRICING DISRUPTIVE TECH
Where are we in the repricing process? Getting there, but not done yet.
The S&P 500 forward P/E ratio has dropped to just under 19 from 21.5 at the start of the year. However, this is still pricey, in the 80th percentile according to historical data. The only time we’ve been higher than this was during the heights of the dot-com bubble.
S&P 500 Energy stocks closed out last week below where they were on March 8, which may indicate that demand destruction is on the way and will reduce inflationary pressures.
Capitulation is not yet here—Barron’s Big Money poll still has nearly 60% of respondents believing equities are the most attractive asset class.
Disruptive tech companies like Peloton (PTON), Rivian (RIVN), and Snowflake (SNOW) have dropped below their opening trading price.
I couldn’t be happier to see this because we can buy these at a serious discount. What’s not to like?
The going will be choppy, so investors need to start buying into their positions slowly.
If things get too ugly, there is no way to time the bottom here, particularly with all the geopolitical risk and potential Fed intervention.
Is Moore’s Law is dead?
The tech revolution that started in the 1990s gave birth to Moore’s Law (which was how we thought about how quickly computers could get faster). This was revolutionary because it meant that innovation was happening faster than the human race had ever experienced.
Well, get ready, because that was nothing!
Today, tech innovation is driven more by Metcalfe’s Law, which was first mathematically formulated by George Gilder, a fellow Mont Pelerin Society member.
What we experience today is all about network effects. We are now in what my friend Raoul Pal calls “The Exponential Age.”
Simply put, the more members in a network, the more valuable it becomes, making it more attractive. This means it will grow more rapidly—at an exponential pace.
We’ve already seen some evidence of this. Many were skeptical of the growth potential of networks such as Facebook and even Amazon. Still, because of these network effects, they grew at a pace well beyond what was previously considered feasible.
The absolute poster child of network effects was Zoom (ZM) during the pandemic. Today, it is struggling because it experienced hyper-network effects, reducing what would have been years of growth into months.
We have seen this in many of these disruptors, but what is happening today doesn't mean it is over.
Remember what happened with the “Cash for Clunkers” program under Obama? That, too, pulled demand for cars forward, but it didn’t mean the future was permanently reduced.
Stocks that look attractive today:
I’m slowly stepping into companies such as …
Peloton (PTON) is ripe to be acquired by a company that is a master of logistics. There are a few of those out there with big-pocket books like Apple (AAPL) and Amazon (AMZN), and maybe even Lululemon (LULU), although its Mirror acquisition hasn’t worked out too well. I’m a buyer when it drops below $8 and a seller above $12.
NVIDIA (NVDA): cannot go wrong with this AI play.
For those that don’t want specific stocks:
Scottish Mortgage Trust (STMZF): amazing tech investment team
Semiconductor EFT (SMH): Semiconductor technology is becoming increasingly ubiquitous, and this trend will only continue at an exponential pace.
Robotics ETF (ROBO): Onshoring and the development of more robust supply chains will serve as a tailwind
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