Stocks have been on a tear for years now. They’ve gone from negative to positive, and then back to negative. And I’d like to know why.
My first thought was this: it’s because people are scared of the future and they want to avoid risk. But while there is certainly some fear associated with the future, the best way to counter that fear is not through risk avoidance but rather through risk taking; which means investing in something that has a chance of growing into something big.
As we get closer to 2022, there are two reasons I think technology stocks will outperform other stocks:
1) The technology sector has already grown for years now and the cycle will continue and grow over time. This means that if you can buy tech stocks now (and there are many reasons why you might be able to buy them), you may end up with a more solid return than if you had bought them at their peak during the pandemic (which could also be before or after).
2) Technology stocks are an asset class which doesn’t face much risk — so they can take on more growth (and thereby greater risks) than other assets like equities or bonds, which face much higher levels of risk.
In addition, this is a very good time for tech stocks, as they have arguably never been as cheap. Yields have fallen from nearly 20% early in the year down to about 3%, but even so all tech stocks would still cost about 15% less than many other companies, including large ones like GE and ExxonMobil .
I think it is perhaps as well to clarify what I mean by “quality” here:
You don’t have to have amazing growth potential or outstanding quality — you just need great growth potential and great quality (which aren’t mutually exclusive). This gives us an opportunity for investors who focus on quality over growth simply because their assets do not face serious downside risk — they can also be better value than most other assets even today! In fact, I think many of these “value” assets should probably be called “growth capitalizations” — that is how they should be viewed at this juncture in history where prices seem stuck in place relative to levels we saw during the early 1980s when everyone was trying desperately hard not to lose money (just when everyone was trying hard not to lose money), just before we got into
What are technology stocks?
In the past few weeks, a wave of financial news has hit us. This wave of doom is not surprising as this is the time that most technology stocks are at their lowest levels in a long time. If you’re looking for a quick-hit take on stocks, then these are the ones to watch:
The Stocks We Want to Sell
Amazon: As its stock price has fallen by over 15% since mid-March, Amazon (AMZN) is still one of the most popular and well-known stocks in the world, but it’s also got some serious problems. For starters, Amazon seems to be running out of steam. It lost $1 billion over two quarters last year, with its revenue falling by 26% from 2017. To make matters worse, Amazon announced that it will cut its workforce by 9% over the next six months. That’s going to put tens of thousands out of work and could have a material impact on its bottom line. And lastly, it was revealed that last quarter Amazon was more profitable than any other company in North America. But despite these issues and concerns about its future health, investors are still buying into this stock as they believe that Amazon’s dominance will only continue to grow and will eventually become worth more than every other company on Earth combined – at least in theory.
Facebook: Facebook (FB) reached $200 billion market cap when it went public back in 2012. Its valuation has since grown dramatically – now topping well over $700 billion – with even Apple (AAPL) dropping down to just below what Facebook was worth before going public (now less than half). But despite this growth, Facebook is still dealing with serious concerns about its long-term strategy and growth prospects. Investors have been dissatisfied with Facebook’s recent quarterly earnings which showed an operating loss for the first quarter since at least 2011 even as revenue soared 70% year-over-year for the quarter ended September 30th . The stock has also been losing investors who want cheaper opportunities than Facebook offers where they can get more exposure to growth as well as away from Facebook’s political scandal woes without having their investment go through such a major drop in price , according to CNBC . So while we think Facebook is going nowhere fast , investors are still betting heavily on the company not only because they believe there is plenty of upside but also because they believe that when things do turn sour , it won’t be too bad either .
What caused the recent surge in tech stocks?
I don’t think it matters much what caused the 20% rally in tech stocks in the last few weeks. I think it is a good thing that we have such a large, under-the-radar market. There is no one, single major factor driving the market. What is happening now is that everyone who’s ever invested in tech stocks has bought them again (and all of them too early). The real question here is whether we will follow suit and start buying them again sometime soon — which I suspect we will do before too long, but not until things stabilize.
For a more detailed discussion, see my post from last week on Amazon and Netflix . But if you are just interested in an overview of what happened, here are some key facts:
– Amazon’s share price is up 7% over the last month; it has risen 23% since the beginning of 2018
– Netflix’s share price has risen 5% over the last month; it has risen 28% since the beginning of 2018
– Some analysts expect that both Amazon and Netflix could be worth more than $1 trillion by 2022
So far these results have been quite good for investors. But they can’t predict how long they will hold onto their gains. For example, even if Amazon or Netflix gets back to its former heights, there will probably be periods when its shares fall (of which there will be many) as well as periods when they rise (of which there will be fewer). This volatility means that investors should expect their returns to vary depending on their particular goals — so long as these goals coincide with the company’s profitability objectives. And while this could lead to a chaotic outcome , investors should not worry too much about this because things are unlikely to get much worse than they already are . It seems unlikely that either company would go bust or get into serious trouble at present .
Are there any warning signs that the bubble might burst?
The tech sector is in a bear market (i.e., as we approach the end of the cycle). The stock market seems to do that from cycle to cycle. The 2008-2009 bear market was a big deal; it was one of the biggest since the dot-com era. Many readers may recall that this was followed by a modest recovery, then one of the longest and most volatile upturns since 2000, then more volatility and the recession.
This time around, after several years of flattening out, we are in for another triple dip:
• The stock market has taken a huge hit this time around.
• Tech stocks are down sharply
• The Nasdaq Composite Index is down over 20%, (and is now at its lowest level since 2001)
• The Dow Jones Industrial Average has dropped over 8%
After such a long decline — it’s not unusual for declines this deep to take almost two years or more — I feel confident that we will see another sharp drop. And there is no reason to think that we won’t have another recession after that; just because it hasn’t happened yet doesn’t mean there isn’t going to be one eventually.
Hence, I’d like to offer some suggestions on how you can avoid getting caught in the boom and bust:
What would happen if the bubble did burst?
The worst case scenario for the tech sector would be a massive sell-off of entire sectors of the economy (especially banking and consumer discretionary). The worst case scenario for the tech sector would be a massive sell-off of entire sectors of the economy (especially banking and consumer discretionary).
But one could imagine a world where the tech sector is not so badly affected. If you look at what happened in 2017, it is highly unlikely that stocks will go down by more than 10% from their all-time highs. This seems like an excessively high chance, but in some ways it is not. I repeat: if you look at what happened in 2017, it is highly unlikely stocks will go down by more than 10% from their all-time highs. This seems like an excessively high chance, but in some ways it isn’t. I repeat: if you look at what happened in 2017, it is highly unlikely stocks will go down by more than 10% from their all-time highs.
What happens if we were to see another bubble coming? A few years ago I published an article called “The Crash of 2018” that predicted what could happen if we were to see another bubble coming. Here is a link to that article under my last name’s name (the URL is https://www.nofilter.com/blog/2018/05/19/the-crash-of-2018/, and there are also links to previous blogs as well). In this article I suggested that a crash might be possible even without any new bubbles popping up; here are just some examples:
• General economic conditions being worse (courtesy of Brexit): GDP growth would have been lower due to reduced demand due to higher import prices and weaker export growth due to lower demand for inputs such as oil, food and manufactured goods;
• A global recession would have occurred due to rising unemployment rates in China and Europe;
• GDP growth in Germany or China might not have been higher than 1%, making them even less attractive relative to other economies;
• Low interest rates might have encouraged people (and speculators) who had no assets other than housing or money lent them by banks into buying houses at prices much higher than costs—reducing household wealth relative to GDP as well as employment levels;
• If workers lost jobs or had their incomes reduced because they were unable to pay off debts they incurred while working part time because
If you are a tech stock investor, do you still have one? If not, would you like to own one? What if I told you the answer was “Yes, but only for a short period of time.”
If you are a tech stock investor, do you still have one? (No)
If not, would you like to own one? (Yes)
What if I told you the answer was “Yes, but only for a short period of time.” (Yes)
If you answered yes to any or all three questions above, here is why:
The wave that should have crashed and fallen has not. Technology stocks may be overvalued now and will continue to be overvalued in the near future. And yet the wave has not crashed and fallen yet. Despite this fact, there is no reason why tech stocks should not continue their current run until they reach their peak. If they do so before then it will be because they were undervalued and/or some other cause of the past few years which did not impact them much at all – such as geopolitical developments that shook up shares of large technology companies – and/or some external factor which made them look better than they really were (such as the surge in crypto-currency prices). In either case, technology stocks won’t crash for several years yet: at least until there is some sort of correction in global economic growth or something else similar comes along to make their price levels less attractive than they currently are. But I wouldn’t bet on it: even without any such event arising in just a few years from now there is little reason to think that tech stocks’ price levels will stay too high for long. So what does this mean for our portfolio strategy? Entering into a technology stock position requires us to take an educated guess about where future returns will lie. And right now it looks like we’re taking an educated guess about where those returns lie pretty high. If we invest our money in tech stocks today we will probably get back what we put into them on average over the next six months or so – perhaps more – but in general these sorts of investments trade with very high volatility so those returns are likely always going to be “hump” from here on out… So when we think about investing in technology stocks today we need to consider whether our long-term expectations for return are likely higher than their current level; and if so if this new level is