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The Standard & Poor’s 500 information technology sector had lost 22 percent of its value this year, its worst stretch over that period of time in any year since 2002… when the U.S. was in slow recovery from the dot com bust.
The six-percent spread between the tech sector and the broad index is the widest since 2004.
Investors have drained $7.6 billion out of tech-centric mutual funds and ETFs so far this year, the biggest drawdown in the same period since at least 1993, Morningstar reported.
Tech had been the markets’ darling for years, with Amazon, Apple, Facebook, Netflix, Nvidia, Microsoft, and, more recently, Tesla being the engines that drove index values to a series of record highs and persuaded investors to put money into everything from cloud computing to social media.
During the COVID-era lockdown, investors redoubled their enthusiasm for the sector as interest rates hit a historic bottom, giving tech companies access to cheap money to borrow to meet insatiable consumer demand.
The world is different now.
After stocking up on tech stuff during the COVID shutdown, people are spending on services instead of goods. Interest rates are creeping up, squeezing tech firms’ financial outlook. Inflation is forcing consumers to pinch pennies.
Instead of taking a flier on high-flying tech stocks, SPACs, and cryptocurrencies, investors have retreated to stocks that will float atop higher prices, such as consumer staples and energy. The S&P’s energy and utilities sectors are the only ones showing gains so far this year.
Stock-pickers also are directing their money into so-called “value stocks,” which are those with share prices closer to projected earnings or book value.
Cigarette maker Altria Group, Coca-Cola, and ExxonMobil have benefited as a result.
Indeed, the S&P Value Index was outperforming the Growth Index last week by 17 points, the widest margin since 2000.
More than $48 billion has exited growth-stock funds this year, with funds focused on value stocks pocketing an additional $13 billion so far in 2022, according to the WSJ.
To many investors, tech stocks’ current dive smacks of the dot-com bust at the turn of the century.
Investors dumped money into any company with a “dot-com” in its name. Tech start-ups took on billion-dollar market values without ever turning a profit or, in some cases, ever claiming a meaningful market share.
In March 2000, at the height of the frenzy, the price-to-earnings multiple on the tech sector skyrocketed to 26.2, the WSJ noted.
In September 2020, at the peak of the latest tech craze, the multiple climbed to 24.2.
Eventually, the craze exhausted itself and investors tried to not be the last one out the door. The tech-laden NASDAQ crashed by 80 percent from March 2000 to October 2002.
Some recent stocks have mirrored that debacle, with hundreds of billions of dollars in value disappearing, sometimes within hours. Snap Inc.’s share price sank 43 percent in one trading day in May, erasing about $16 billion from shareholders’ accounts.
Now, with tech stocks already sliding, the U.S. Federal Reserve’s promise to keep raising interest rates will continue to hold them under a cloud: higher interest rates crimp the companies’ future cash flows because they have to pay higher interest costs, and profits and earnings suffer.
However, the ratio of pessimistic options on stock prices to optimistic bets in the Technology Select Sector SPDR Fund has shrunk recently, indicating the worst of tech stocks’ rout might have passed, the WSJ said.
Even after this year’s crash, tech companies still comprise about 27 percent of the S&P 500’s roster, close to highs of the dot-com era, Bank of America analysts recently reported.
Still, they warned that it remains too early to “buy the dip.”
TREND FORECAST: “Dot-com overload will short circuit many high expectations for huge profits in Internet commerce, entertainment and a wide array of dot-com services. Following the holiday season, many of today’s high flying Internet stocks, the hottest IPOs, and newly emerging IPO-wannabees will have begun the descent from their overvalued heights.” The Trends Journal, Fall Issue, 1999.
What happened 22 years ago is happening now… just a different time, some different language and some no-tech along with the hi-tech that is tumbling down. In our 4 May 2021 article, “IPOs SET RECORD PACE,” we noted that SPACs were among the factors artificially inflating market values.
We had forecast for a major market correction, with SPACs and their related companies being hit among the hardest. Indeed, the SPAC mania is reminiscent of the dot.com days when billions were invested in hi-tech companies that created nothing and made no financial or common sense.