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What just happened?
Just days after charting a new record high, technology stocks, as measured by the Nasdaq Composite COMP, +2.58% Index, closed Tuesday in correction territory: a decline of at least 10% from a recent peak.
For some analysts, it’s a healthy, if dizzying, modification of valuations that leapt into nosebleed territory for no good reason, but others wonder if there’s a bigger story to be told.
See also:Here’s the silver lining — stocks have done well after similar Nasdaq corrections
“Tech only returns +50% over 100 days in 1) a bubble (2000) or 2) a cyclical recovery (2009) and we continue to believe 2020 fits the latter paradigm better than the former,” wrote Nicholas Colas, co-founder of DataTrek Research, in a Wednesday note. “At the end of the day 2020 is an early cycle year (more like 2009) rather than a late cycle one (like 2000).”
Colas has argued a few times this year that 2020 market conditions resemble those in 2009, when the world was emerging from a shock to the financial system. It was hard to imagine at the time, amid concerns about the stability of the biggest banks, double-digit unemployment, and a deep and long-tailed housing crisis that would lead to millions of foreclosures and lost home equity — but markets, and the economy, did eventually heal.
For that reason, comparisons to 2009, amid the shock of the coronavirus pandemic and the worldwide call to shelter in place and shutter local economies, can be both comforting for investors, and provide a playbook to follow.
What’s more, comparisons to the dot-com bust are unfounded, Colas argues and other analysts say the same. “Tech’s fundamentals are ferociously strong just now even though the US/global economy is in a deep recession.”
We’re at a once-in-a-generation technological pivot, finally enabling knowledge workers to do their jobs remotely, bringing futuristic innovations to logistics, and more. “We’ve had five years of disruption in five months,” in Colas’ words.
But there’s another reason it’s somewhat more comforting to imagine the present moment is like 2009 rather than 2000. That’s because when tech stocks peaked in March 2000, it took nearly 15 years for them to recover.
It’s also worth noting, as Colas does, that if you believe there are good justifications for the big rally in tech stock this year, those reasons may not have a ton of staying power.
“The next five months are not going to give us another half decade of Tech-led disruption,” as Colas puts it.
But that’s okay! “There are plenty of other cyclical sectors to consider if you (like us) believe the US/global economy will continue to improve. We continue to favor Industrials XLI, +2.04% (plenty of earnings leverage) and US Small Caps RUT, +1.50% (no Big Tech exposure).”
