Holy Cow! For a moment yesterday, I had returning visions of the Great Dot-Com Crash of two decades ago. The FANG icons of Facebook (META) Microsoft, Amazon, Google were all suffering double digit losses. META in particular looked a lot like what some people would call ‘capitulation’. Any reasonable investor was asking ‘Will this produce the kind of ‘incidental roadkill along the ‘information highway’ that saw the evaporation of things like AOL and Yahoo 1.0 twenty years ago?” Or is this time different?
I’m going with the ‘It’s different’ view.
I think what we are seeing is a reset of expectations, mainly of what do we want the Future of Tech to be? And on what time frame?
The common element of the big losses at the Kings of Tech is cloud services. Microsoft’s Azure, Amazon’s AWS, Apple’s iCloud: all of these divisions of the big icons were seen to be significant drivers of revenue, even if they were not commonly thought of as being the faces of their companies. For example, many people think of Amazon’s online retail business as the very definition of the company but that’s not an accurate picture of Amazon. Amazon Web Services (AWS) is top dog for revenue and profit. Advertising comes in at second place, online retail struggles to break-even.
Cloud related activity enjoyed a huge boost during the Covid pandemic, and it should have been understood that some, perhaps significant, retracement would occur as the pandemic subsided. I think a lot of people did have that in their forecasts, but few expected the adjustment to happen all in the course of a day or two.
Over at META, the problems were, and are, different. With former COO, Sheryl Sandburg and former CFO, Dave Wehner gone, Mark Zuckerberg was left alone to guide his company – a company in which his personally held shares have seen a loss of some 80 billion dollars year-to-date! Mark’s vision is ‘The Metaverse’ – a world of virtual and augmented realities. That might be great as a vision, but Zuck was finding it more and more difficult to answer investor’s questions like “where does the revenue come from?” The Metaverse is probably in everybody’s future – but not tomorrow.
Anyway, there is another side to this coin. (Isn’t there always?)
As long as the FAANGS were the high-profile darlings of the street, they attracted maybe more than their fair share of investor capital – short-changing many other companies which arguably could have been equal or better long-term plays. With the de-gilding of some lilies, it may be time to notice some of the other flowers in the garden.
Ron’s Market Minute – Playing the Odds
Yes, we know that many (most?) of the big investment firms have agreed that there is or will be a recession. Frankly, I’m in the camp that agrees that there is or will be one. However, the big question in my mind is WHEN does it actually start?
There are plenty of signs that things COULD get ugly, but what if that ugliness only takes hold of the nation’s psyche about the middle of NEXT YEAR? Recessions have always included a large drop in employment figures, and well, it’s just not here YET.
With that in mind, I note that yesterday (102722) our favorite early indicator of markets, the ‘junk bond’ index managed a close above the 50-day moving average. That could be reversed of course, but for the moment it’s a positive sign. Along with the move above the 50MA, we saw a surge of buying of stocks (likely algos), and a similar surge in prices (except in the Nasdaq, see above message). With that in mind it MAY be a time to lean a bit toward the possibility of markets heading upwards through the end of the year.
Continuing, although technical conditions are pretty ‘iffy’, we have just entered the HISTORICALLY most bullish period of the year. The S&P Index* and the Nasdaq Index* can be separated into the longish historical periods, the good ones, the not awful ones, and the UGLY ones. Here is the history of annualized returns since 1950,(courtesy of Hirsh publishing).
- The Good (October 27th close through January 18th close): +21.22%
- The Not-So-Bad (January 18th close through July 17th close): +8.99%
- The UGLY (July 17th close through October 27th close): -1.29%
Also of interest, the ‘Good’ period ended higher than it began in 62 of the 71 years covered. Has it gone up every year? No, of course not. In 9 or those years it’s closed lower. But the historical odds do favor the bulls. And two of those UGLY years were 2018 and 2008 which had their own oddities to affect the markets.
So, this is definitely NOT a slam-dunk, I’m just pointing out the historical odds. We are less bearish than we were over the past month or three.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
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