The extraordinary rally in markets, since their plunge in the very first stages of the coronavirus pandemic, was based in our opinion on two reasonable assumptions. One was that lockdowns would permanently change how we live our lives – benefiting, above all, the technology giants. The other was that central banks would be unable to raise interest rates from emergency levels, at least for the foreseeable future. The fall in the value of the tech – heavy Nasdaq Composite Index during the past few weeks demonstrates that both in our opinion are now being tested. That might be bad for tech investors but, ultimately, it reflects good news for everyone else. Since the peak in November last year the index has fallen by over 10%, meeting the technical definition of market “correction”. This has been led by lockdown – sensitive stocks. Recent reports that luxury exercise bike maker Peloton – a diversion for those confined to their homes – was halting production due to falling demand led to a sharp drop in its shares.
Then after the market closed, Netflix, the streaming service, warned investors that subscriber growth was set to slow. Falling share prices for the two companies in our opinion mean they are joining other previous pandemic winners such as Zoom, the video conferencing software maker. A broader self-off in riskier assets also reflects the changing stance of major central banks, especially the Federal Reserve (Fed). Investors in our opinion have lost interest in lossmaking technology companies, in particular, since Fed chair Jay Powell indicated that the central bank would begin to withdraw its emergency pandemic support earlier than first predicted. Growth companies of this sort are the most sensitive to changes in interest rates.
Yet poor results for companies that profited from lockdowns are in our opinion a bullish signal for society more generally. Fears over the Omicron variant have subside and so investors who anticipated further lockdowns, and consumers being confined to sofas rather than cinemas, and Pelotons rather than gyms, will be disappointed. Those of us who prefer a busy social calendar to social distancing should be pleased. The Fed’s more hawkish tilt, too, is ultimately good news, reflecting a return to something approaching full employment in the US. Even the snarled-up supply chains are partly an indicator consumers are feeling confident to spend, rather than pile up savings.
Even after the recent sell-off, markets and technology stocks in particular are still up significantly from two years ago. The “correction” is aptly named: valuations of some of these companies got out of hand relative to their underlying earnings. A further fall in our opinion will add some needed discipline to the market, finally reminding investors that share prices can go both ways. Bitcoin, an obvious indicator of speculative frenzy, has fallen to its lowest level for five months and in our opinion will stay on this level for the upcoming weeks if not months.
Others may see the recent drop as a buying opportunity – we don’t. While the Fed is embarking on a tightening cycle in response to higher inflation, long-term equilibrium interest rates are in our opinion still likely to end up low by historic standards, but this time not supporting equity values. The fundamental demographic and technological drivers of the secular decline in long-term interest rates, such as aging populations putting away more to save for their retirement, will in our opinion have an impact on spending habits. Tech companies, too, have often proved that changes will come. The changes provoked by the pandemic, whether it is how we shop, work or relax, may take in our opinion longer to bed in than first predicted. Markets in our opinion have got ahead of themselves with the bull market but they should not overdo the correction either. A new balance have to be found, with or without Netflix, for now it’s better we chill and wait.
