While the FAANGs have so far held up ok (ex-Netflix), there’s a lot of small or mid cap tech stocks that are down 50% or more in just a few weeks. ARKK and related ETFs are down more than 50% since Feb 2021 highs.
I understand a lot of this is due to the Fed’s new hawkish stance which disproportionately impacts high p/e stocks like many public tech companies due to rising rates and asset purchase tapering.
But how long is this trend away from tech going to last?
Let's say you have two companies: 'Established' that makes $100 million/year, and 'Growth' that will make $200 million / year in 10 years, but $0 / year today.
Let's say both of these facts are 100% certain and that all market participants agree. Finally, we assume all market participants work off of a 20 year investment cycle just to keep things simple.
---------
With 0% inflation, both companies are equal over the 20 year lifecycle.
However, with 5%/year inflation, the established company comes out far ahead.
The $200 million made in year 10 by Growth is only with $122 million (year 1 dollars).
So you can see, future money is less valuable in an inflationary environment. In contrast, the $100 million made by Established is worth $160 million in year 10.
-------
Once we account for inflation, the growth strategy fails. Alternatively, growth strategy only works in low inflation environments.
In high inflation environments, established sources of money and established real estate / factories is better. The growth company promises to buy a factory in the future, but we all know inflation is making that factory more and more expensive, and it's future promise of future money is getting less valuable.
1) inflation continues to rise, keeping the pressure on the Fed to raise interest rates. This being so, entities like retirement funds that must have some yield, now have non-risky options to get it. They rotate out of tech stocks, which are generally considered higher risk, higher yield.
2) crash in stocks causes the Fed to lose courage, they don't raise interest rates after all. Now Treasury bills and other low-risk options are too low yield, not even keeping up with inflation. Whether they are confident in the tech stocks or not, entities that must find yield somewhere will invest in them because "lower-risk" options are no longer options, as they are guaranteed to lose money on an inflation-adjusted scale. This means tech stocks go back up, even if nobody much believes in them.
Whether or not the Fed (and European Central Bank and other similar entities worldwide) are more afraid of inflation or of stock prices crashing, is not a thing I can tell you. But those are, I think, the two scenarios.
Sure, there's a downturn and it's related to COVID and the US printing money, but overall there's not that much of a downturn. Will it continue? Who knows. Is it tech or is it more of a general downturn in the market? It's definitely not exclusive to tech.
I believe advertising has reached a peak and has been declining for a while and we’re finally seeing the downstream effects of that.
The FAANG behemoths on the other hand have ad based revenue that isn't going to dip - at least from this aspect of the macroeconomic environment. Other things will crater that, if those things are successful on the public policy side.
FAANG traders likely will take lower price:equity ratios so the shares will trade lower.
For example, Cloudflare ($NET). More than 58% down from its all time high, even before the Fed announcing their interest rate hikes. In the long term, it will possibly reach its all time high again, but needs to correct first before that. Some other stocks many never reach their highs again.
Now it should be easy to agree that this was indeed an obvious sell signal [0] despite many at the time telling you to buy.
Nobody knows. It’s a non-answer, but the only truthful one.
Having said that, the Fed does also boost or squelch the ability of banks to lend to companies/their ability to increase performance not backed by actual profits and expenses (P/E). If you're an investor you look at P/E and the value of products. If you are a trader you look at stock price/performance almost exclusively. Traders trade both directions at all times (hedging long positions). Investors only play long positions. VCs seek to empower companies with potential.
1) the drop starts because the fed starts to withdraw liquidity...
2) the market will trade sideways while the fed unwinds its balance sheet...
3) Once the market drops sufficiently far (30%+), or a recession is induced, the fed will blink and inject liquidity again ...
4) Causing the next wave of growth.
Those that have crazy valuations but no clear sign of turning enough profit to remotely justify that valuation are going to have a rough few years ahead. There’s a lot that will need to be washed out of the system before things reset and the cycle starts again.
The "Growth Bubble" will burst, and those companies will shrink back to valuations that are not completely detached from reality (which in some cases will be 0).
FAANGs will still be money printing machines, the same as they've been for the last decade - no big worry there, just a slight correction (10-20%).
But "Crashing" is point of view. I.e. if you short the market (a seller), the market is actually up. I.e. you should not try to time the market but time the DIRECTION of the market.
Also, the Fed is not hawkish, if it could it would not raise rate.
I'd rather own an OIL company at 3x FCF than Netflix or anything like that.
When the policies swing back, so will the market.