When tech stocks sputter, the entire stock market sinks

The stock market adores high-growth tech companies — until it suddenly doesn’t. And when the mood changes, as it has this year, the brutality of the stock market goes on spectacular display.

Consider what has happened to Meta, the company formerly known as Facebook, the archetypal social network. Its earnings have shriveled, and it has begun laying off workers. Worth $1 trillion only a year ago, the company has lost nearly three-quarters of its stock market value. Meta’s problems are idiosyncratic, yet they are also a cautionary tale, one with application to investing in just about all tech companies in an era of raging inflation, rising interest rates and plunging asset prices.

Investments that looked splendid when cash was cheap have lost much of their allure. The Federal Reserve isn’t merely raising interest rates. It now promises to hold them at high levels for a long while — making a recession more likely.

Also Read | Asia stocks surge as cooling inflation feeds hopes Fed will ease up

As long as these austere conditions persist, the stock market is likely to have far less appetite than it did just a year ago for entrepreneurial visions with long incubation periods. Investors have turned against Meta, but a very broad range of tech companies, including Apple, Amazon, Alphabet (Google’s parent company), Microsoft, Netflix, Uber and Nvidia, has also been subjected to market punishment, of varying severity.

Everybody with broad stock market holdings owns tech stocks, and those accounted for most of the market’s gains last year. But now, tech-stock declines have pulled down the overall market. The information technology sector alone — which includes Apple, Google, Microsoft and Nvidia — accounted for 44 per cent of the decline of the entire S&P 500 this year through October. But that understates tech’s negative impact on the market this year.

Meta, Alphabet and Netflix are classified in the S&P 500 as communications services stocks; Amazon, Uber and Tesla are in the consumer discretionary category. Each is unique but in common parlance — they are all tech stocks, and when you include everything that fits under this expansive rubric, you will have enumerated nearly all of the stock market’s losses.

The market’s punitive mood won’t last forever. Companies with solid earnings and strong prospects for growth will be rewarded with higher stock prices down the road, so I wouldn’t abandon investments in tech companies just because they have been hammered lately. I own shares in all of them through low-cost index funds that mirror the entire stock market and intend to keep doing so.

But because we don’t know when the tide will turn or which particular stocks will prosper, buying shares that have declined sharply in the expectation that they will soon rise isn’t prudent. You could easily be hurt.

Just look at what’s been happening to Meta.

Veering Into Virtual Reality

In October 2021, when Facebook was still riding high, Mark Zuckerberg changed the company’s name to Meta, signaling his new focus on “the metaverse” — a nascent blend of virtual reality and social networking. In a letter to shareholders, he said achieving this vision would be expensive but worthwhile: “Our hope is that within the next decade, the metaverse will reach a billion people, host hundreds of billions of dollars of digital commerce and support jobs for millions of creators and developers.”

I’m agnostic about this claim. It’s quite possible that the metaverse will pay off in a big way, though it may not.

It’s a big risk. But that’s what tech growth-stock investing is all about: placing a risky bet in the hope that it leads to exponential, immensely rewarding growth. Sometimes, such bets pay off.

Market Discipline

But the market environment for most of this year hasn’t favored risky ventures like this. To the contrary, it has, for the most part, been a decidedly “risk off” year — with money flowing out of speculative bets like the metaverse and cryptocurrencies into safe niches like short-term Treasury bills and money market funds.

Recall that as recently as September 2021, when tech stocks were still in vogue, the market valued Facebook at more than $1 trillion and ranked it as the sixth-most valuable publicly traded firm in the world.

But as skeptical reviews of Meta’s version of immersive reality spread, and the enormous costs of the experiment became evident, the market turned against the company. Apple’s tighter privacy rules didn’t help. They limited Meta’s ability to sell targeted ads that run on iPhones, and constrained its revenue. In one single day in February, Meta’s shares lost $230 billion — more, by some accounts, than any company had ever shed in one day. The flogging has continued. After fresh revelations on Oct. 26 of disappointing earnings and ever-bigger expenditures on the metaverse, the stock plummeted again. It is now worth a bit more than $269 billion on the stock market — close to a quarter of its value last year. Meta announced large-scale layoffs on Wednesday, an act of fiscal discipline that may stem the rout of its stock but that leaves its future open to question.

A great deal of damage has already been done at Meta and other tech companies. Hiring has slowed, and many companies, including Lyft, Stripe, Redfin, Snap and Twitter, under its new owner, Elon Musk, have been laying off employees.

This year through Thursday, Meta stock declined 67 per cent. Other tech companies with long histories of resilience and solid earnings have done better, but none have done well.

The S&P 500 has fallen 17 per cent this year, thanks, in large part, to tech stocks. Here is a sampling, from FactSet:

  • Apple, -18 per cent
  • Microsoft, -28 per cent
  • Alphabet, -35 per cent
  • Tesla, -46 per cent
  • Netflix, -55 per cent
  • Amazon, -42 per cent

How to Proceed

If you have an appetite for risk and high regard for these companies, it may be tempting to plunge into these stocks now, simply because they’ve come down so far. That may be a good idea, if you have a strong long-term conviction and have just been waiting for a better price. I have friends who have owned Apple stock on and off for decades, buying and selling when the price has seemed right.

If I were buying specific stocks, I would take a value approach — buying solid businesses that generate ample cash flow, as Warren Buffett has recommended, with the intention of owning compelling businesses for a lifetime.

I’m strictly a fund investor, however, and use mainly broad low-cost index funds, which I’m still buying steadily, with the idea of holding them for a decade or more. They include tech stocks and a wide range of others, including fossil fuel stocks like Exxon and Chevron, and health care companies like Cardinal Health and Cigna, that have prevented my portfolio returns from being even worse. I hold bonds in these broad funds, too. They haven’t helped much lately, though I expect bonds will soon perform better, with interest rates already having risen substantially.

In short, I wouldn’t put money into tech stocks — or any other stocks, now or ever — with the hope of making a quick buck. The risks seem too high, and the odds of mismanaging the timing are too great. Especially in a fraught economy like this one, I would focus first on making sure I had enough money to pay the bills before putting any of it into stocks.

But, for the long run, I’m still optimistic. If you have enough resources to withstand what may well be further market declines, I would try not to worry too much about the awful performance of tech stocks. Many of these tech companies are still generating reasonable profits, and others will make a lot of money one day, maybe even Meta. I wouldn’t place a big bet on any one of them, but I’d bet on the entire market over the next decade or two.

Read More: When tech stocks sputter, the entire stock market sinks

2022-11-12 05:07:25

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