Doc's Daily Commentary
Mind Of Mav
Is The Correction Just Starting Or Are We Going Higher?
Only two weeks ago, the US Technology sector somehow managed to be valued at more than $9 trillion, making the US tech sector more valuable than all European stocks combined. Tesla somehow became the seventh-largest company in the US after announcing a five-to-one stock split. Stay-at-home stocks like Overstock.com went parabolic mainly due to pure speculation and insane predictions by analysts.
Meanwhile, the world is literally on fire, the pandemic is still causing massive global strife, and the contrast of an economy wracked by uncertainty against a stock market chasing new all-time highs for the past five months has been striking.
Suffice to say, as we’ve seen the stock market endure a correction over the past two weeks, it hardly surprised anyone. Least surprising of all was a drastic fall by Tech Stocks — the sharpest sell-off since March.
The weakness came on the back of overvaluation concerns, which prompted investors’ to cash in on big gains clocked in August.
Some news contributors think this is a normal correction, others believe this might be the start of a more prolonged, long-overdue selloff in technology. Some go far as to say we’re going to repeat of the Dotcom Bubble Burst of 2000 — after all, we’re less than two months away from the 20 year anniversary of Pets.com going out of business and sock puppet mascots going out of style.
Now, here’s the big question to ponder: what will happen now? Clearly tech stocks are overvalued and obviously the entire stock market is propped up on capital from the Fed, but taking a bearish position for the last 5 months would have been portfolio suicide. So, let’s try to understand where we are, where we’re going, and what we should do to capitalize on the trends.
Is The Tech Bubble About To Pop?
Now, even with the significant overvaluation and a correction likely for many tech stocks,
If you have a 5 year time horizon, tech is still primed for incredible growth against a stagnating main-street economy.
That said, many tech companies trade on momentum and pull forward a lot of future growth expectations. Since March, the multiples on many tech companies have doubled.
I see two good reasons and one bad reason for the current tech bubble.
GOOD: Covid-economy benefits tech. Companies like ZM, SHOP are literally doubling or tripling in revenue in just a few months, its simply insane under normal circumstances. So a 2x or 3x multiple expansion here was quickly followed through with growth to match
GOOD: Rates are looking to stay low for a long period now. Fed has given up on any real rate increase for the foreseeable future. This also expands multiples across all asset classes. Expect Jerome Powell to keep that status quo as the Fed meets this week for the last time before the election.
BAD: Flight to safety. We saw this with stocks like SBUX in 2018. They were the “flight to safety” stock during a panic, but eventually the hype unwinds. I think we are seeing some of that with the current pullback here.
Traveling back in time to the 2000s, we saw a similar timeline to the recent market rise and drop when the Nasdaq surged past 3000 to the 5000s in a matter of months before tumbling down in April 2000, which signified the beginning of the dotcom bubble burst.
So, are we about to see history repeat? Is this another bubble burst?
Let’s first understand what defines, and distinguishes, this tech bubble from the bubble twenty years ago.
Actually, what defines a bubble at all?
“I define a bubble as something where assets have prices that cannot be justified with any reasonable assumption”
And yeah, There are plenty of tech companies where the justification of the prices of their “assets” may be questionable.
If you’re familiar with startups and the current market conditions of tech companies, this might already sound similar; these are big tech giants and startups with huge valuations that sometimes don’t make sense.
What is more alarming are startups that have these assessments with barely any revenue in the door and instead a ‘speculative’ valuation on the company’s worth.
Most of the time, this comes down to future speculation as well as what investors think the technology is worth years down the line, especially in areas of deep tech like AI.
Although this may sound like a repeat of the 2000s, there is a big difference compared to what happened in the past.
Technology has a footprint in every industry
One of the clear differences is that technology has now evolved to a point where it exists in every industry in different forms.
It could be as simple as an email software to a sophisticated AI tool.
There is no doubt that technology has shaped how we work and has especially helped the world continue moving even during uncertain times.
Imagine if the pandemic happened, and we didn’t have the ability to remote work or video conference. This paints a picture of how much technology has influenced us, especially in a time of need.
Now, I’ll start by saying that I am unabashedly a believer in technological progress. At the same time, I recognize that the expectations, and the hype, that surrounds tech and progress can easily grow to unsustainable levels.
This is the hardest part about being an investor in the industries and companies that are working to build tomorrow: making an objective assumption about what tomorrow will look like. Trying to limit the gap between what you think is disruptive innovation vs. what is actually a catalyst of disruption and progress and change.
You could look at the Dotcom Bubble burst as a great example of that: The internet was a massively disruptive innovation, but it wasn’t ready in 2000. It needed a few more years of expanded infrastructure, and a few more touchpoints of expanded access, namely, the smartphone and social media.
Now, the internet is ubiquitous, all around us, and we interact with it multiple times a day without even thinking about it. We don’t “surf the worldwide web” like we did in the 90’s, we tweet, share, like, follow, stream, listen, read, watch, search, order, review, chat, post, upload, download, and form entire digital identities, communities, and content networks that transcend borders, cultures, and languages.
The 2000 stock market bubble and 2008 global financial crisis kept everyone’s attention on Wall Street. During that period of time, multiple technology companies were able to scale aggressively and we now live in a world that feels dominated by these various entities. The landscape has been shifting over the last 24-36 months though — it feels like regulators and politicians have become obsessed with breaking up perceived monopolies and increasing their oversight of the industry.
The companies I’m not as interested in are the “dinosaurs”, the old guard that are likely to be disrupted or too slow to adapt, like Intel, Oracle, Cisco. Which isn’t to say they won’t do well, look at Microsoft, I just think there’s a lot more upside elsewhere.
I believe in the law of accelerating returns. It’s not that other industries aren’t going to continue to grow, but innovative companies will continue to outpace the rest, and as the pie grows over the coming decades they will eat up more and more of it.
Are we at the end of this correction?
I’d love to say yes but I’m afraid stock prices have risen so high, so quickly, it seems very likely markets are going to continue to trend downward for some time. After all, if all good news has already been priced into stocks (and I think it has), then all that’s left to price into stocks is the mounting bad news;
– Trade trouble with China continues.
– Fall has arrived and soon influenza will start spreading.
– The US election is close and it will almost certainly be contested.
– The pandemic is likely to continue much longer than many investors first assumed.
– Eviction rates are rising and unemployment remains extremely high with more businesses going bankrupt every week.
We are in a pandemic-induced recession. Neither hopes and dreams nor the Federal Reserve can change that. The economy may be recovering but it is recovering from a very low point. We may have years to go before the world economy is able to completely recover to the pre-pandemic levels.
Stocks markets have been detached from reality for months. Unfortunately for investors, it looks like reality is finally setting in. I don’t expect markets to go straight down — in fact, it looks like we might get a positive bounce today after yesterday’s brutal selloff. However, I would prepare for continued volatility and more stock market losses over the coming months.
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