The NASDAQ dropped 2% nearly 2 weeks ago due to heat from the financial services sector, while tech stokes were hit hard in particular, giving up 20% of their year-to-date gains.
Goldman Sachs put out a report, which suggested that the tech sector was getting close to bubble valuations similar to those experienced during the run-up to the crash in 2001. When investors got wind of this, it sent them into panic mode!
The investment bank wrote that the market was perhaps relying too heavily on the growth of tech companies such as Facebook, Amazon, Apple, Microsoft and Google. The report claimed that these 5 stocks were responsible for 55% of the market’s gains in 2017.
Source: IDG Connect
It’s not surprising that these tech giants are responsible for such heavy gains in early 2017. Hedge funds piled into tech stocks in the beginning of the year, as measured by tech sector ETF inflows, which spiked in Q1 2017. That was before the biggest weekly outflow in over a year in early June.
Goldman further added that their good performance so far has been supported by “Goldilocks conditions”. That is, declining interest rates have contributed to the healthy growth and that as the Fed tightens, we may see some pushback on profitability. Remember, when interest rates are low that means money is cheap. Companies can afford to borrow money more easily and use it to fund their growth. Take that cheap money away and it gets harder to maintain growth.
The belief is that there are two possible outcomes to this scenario.
- The Fed tightens aggressively and stocks become cheaper as valuations drop.
- Economic growth slows anyway as the current pace proves too high to keep up.
The question is, as it always is, what does this mean for the bull market?
Apple and other big tech stocks actually recovered.As of June 19, 2017 are back at record heights. Amazon in particular, dropped from $1000 to $950 and then back up to $995. This rise in price indicates that investors took full advantage of the drop, meaning they bought the stocks when they were at a low anticipating they would shoot back up again. (buy LOW; sell HIGH)
It’s a classic example of buying on the dip. When confidence is high and stocks suffer a setback, people tend to see that as a buying opportunity rather than cause for concern.
Should we worry?
That’s the multi-million dollar question. According to Goldman Sach’s analyst Robert Boroujerdi the top tech stocks are cheaper than their counterparts were during the 2001 bubble. The counterparts he named were Cisco, Oracle, Intel, Lucent and Microsoft. They also are more robust, holding more cash (Apple is reportedly sitting on a war chest of $250 billion) and generating better cash flows.
Source: Mac Observer
But while these tech giants are in good shape, there are factors to consider before placing your money in this now 7-year-old bull market.
No one really knows why recessions occur. It could be a sudden event like the collapse of the housing market in 2008 or it could be a slow downward grind. The US has never had a bull market last more than a decade, and when the unemployment rate falls under 5% (a level it has remained under since January 2016), a recession usually follows in the next 2-3 years.
Be wary and take appropriate steps to hedge your bets.