No two market environments are ever alike but there are certainly similarities over time.
For example, the post-corona crash period in 2020, which spanned the first few months of 2021, shared a lot of characteristics with the dot-com bubble of the late 1990s:
- IPOs Were Going Bananas
- Day trading back in favor of the investing public
- speculative behavior was rampant
- Tech stocks were crushing everything else
- People were crazy to invest in new things
- It seemed that innovation was creating a new world order
- Expectations diverged from reality for many investors
- Warren Buffett and other value investors were brutally mocked
Like every cycle, nothing lasts forever. And as luck would have it, the consequences of these paradigm shifts look eerily similar.
After the dot-com bubble burst in late 2021 and 2022, the same way as the early 2000s are playing out:
- Commodities are booming
- Energy stocks are soaring
- The housing market is booming
- Tech stocks fall
- Value stocks are finally outperforming
- Warren Buffett is back
And that’s not to mention the geopolitical events that changed history forever (9/11 and the war in Ukraine).
Obviously, there are a lot of differences as well.
Inflation was nowhere near 8% in the early 2000s. Interest rates at that time were also very high (about 5% on average on 10-year treasuries from 2000-2005).
In the early 2000s there was no supply shortage or pandemic or streaming services or social media or iPhones or a bunch of other stuff.
These comparisons are never perfect.
Another difference between now and then is that the tech sector was not nearly as big as it is today. See the difference in the top 10 holdings between now and 2000:
Of course there was Microsoft (the only name that appears on both lists), Intel and Cisco. But Apple, Microsoft, Amazon, Google, NVIDIA and Facebook alone make up about one-quarter of the S&P 500 today.
The Nasdaq 100 ETF has approximately $180 billion in assets under management. The Nasdaq is down 20% now and it is estimated that some $5 trillion in assets may have evaporated during this sell-off.
The Nasdaq fell more than 80% after the dot-com bubble over the course of a few years and an estimated $5 trillion was wiped out.
There is a lot more money now tied up in tech stocks than at the turn of the century, be it tech-focused funds, individual holdings or index funds.
It is interesting to look at the current slowdown from the perspective of the S&P 500 sectors. The S&P itself is down 11.5% so far in 2022.
There are only three sectors that outperformed the index – communications (a tech-heavy sector that includes Facebook, Google, Netflix and more), consumer discretionary (Amazon is the largest holding) and technology:
Energy is the only sector with positive returns this year, yet it makes up only 4% of the index.
This means that most investors, by definition, have a low weighting for the best performer and a high weighting for the worst performer.
So the investment goes.
But I’m sure all the more tech-heavy investors are now wondering what it will take for tech stocks to return to the throne.
Obviously, this may take some time. Tech has actually outperformed since the end of the Great Financial Crisis.
Inflationary conditions above the long-term average could continue to make trading this painful for growth investors. High inflation, high (nominal) economic growth and high interest rates are the type of environment that favors value stocks.
Yet should this scenario continue, the flip side of this is probably the need for tech stocks to get their mojo back.
Let’s say inflation remains stubbornly high. It could cause consumers to rein in their spending (unlikely but you never know) or the Fed could throw us into a recession to get prices under control (a high probability).
Rates would have to be raised, which would slow growth, which would slow inflation and potentially send us into recession.
In a recession, interest rates fall to compensate for slower economic growth.
This will bring us back to a state of low inflation, low rates and low growth. This seems like a much more ideal environment for tech stocks to flourish.
Tech stocks don’t necessarily need these terms to perform well, but if investors believe they matter, they do, at least for some time.
Listen, I don’t know when we’re going to go into recession. It may start this year or it may start five years from now.
There are too many moving parts to predict something like this right now.
And if we see a slowdown in economic growth, it’s highly likely that most stocks will continue to decline, even those that have already crashed, such as hyper-growth tech names.
But I think a fair case needs to be made that the current environment which is so toxic to tech stocks can turn out to be the saving grace for the sector.
One of the biggest reasons why so many growth stocks have crashed over the past year is because things got out of hand and investors took things too far.
Ironically, the same can happen with inflation. If this goes too far and pushes us bearish, it could actually be a good thing for tech stocks over the long term.
Recessions provide few resets in markets where winners are rarely among them.
The corona crash and the ensuing government spending turned positive for value stocks and negative for growth stocks.
A future recession that slows inflation may have the opposite effect.
Further reading:
Boom-bust cycle in commodities
