The world’s “about to learn if the $1 trillion tech rally was a good idea”, one of this weekend’s feature stories on Bloomberg ominously proclaims.
Spoiler alert: It wasn’t. A good idea, that is.
Too often, we conflate getting in lower than the next person in a “greater fool” market with making a “good” decision.
The reckless among you will contend that any decision which results in booking a gain was a good one, but that reflects an inability (or unwillingness) to view market behavior through the same lens we view everyday life.
Good decisions are often separate and distinct from good outcomes. Not every good decision produces a good outcome, just like not every bad decision results in a catastrophe.
If I get killed in car crash on the way to volunteer at the local animal shelter, was my decision to volunteer a “bad” one? In one respect, yes – because I’m dead. But it would be strange to suggest that my untimely demise in that scenario was the result of “poor” decision making.
On the other side, if I drink the bar clean out of Hendrick’s one night then drive 80mph on the way back home, was that a “good” decision if, for example, another driver sees me swerving in and out of lanes and, based on my behavior, resolves him or herself never to drive drunk, thereby saving some unknown person’s life they might have accidentally taken driving drunk years in the future? Clearly not.
And so it is with this:
I always hesitate to cite Apple when talking about tech “bubbles”. It’s fairly easy to make the case that Apple is at least one of the best-run companies in the history of the world, and it most assuredly has produced some of the greatest hardware in the history of tech. And now it’s got a viable services business too. So, it’s probably never a truly “bad” decision to buy Apple. And yet, anyone who has this discussion right now is compelled to mention the shares, as they’ve more than doubled. The bottom pane in the visual above requires no caveats, though. Info Tech has lapped the broader market over the last year.
Irrespective of whether tech shares go higher – as Paul Tudor Jones suggested they might, in keeping with the type of sheer insanity witnessed during the dot-com bubble – it makes little sense to describe buying up here as a “good” decision.
Buying parabolic moves is never a “good” decision, irrespective of how it turns out. Well, that’s not entirely true – as with anything else, there are exceptions, which in this case would mean earnings eventually justifying lofty share prices. But even then, you have to question whether anyone really has the kind of foresight you’d need to confidently declare that buying big-cap tech trading at 23X forward earnings is a “good” idea.
Even with Friday’s swoon, the Nasdaq 100 only fell 0.35% on the week. We’ve been over this on numerous occasions this month, but just to reiterate, the following visual isn’t sustainable and we don’t mean that in any kind of sarcastic “what could go wrong?”-type of way. Rather, we mean that objectively speaking, this will not last:
That last yellow oval over there on the right-hand side is going to “correct” itself. That doesn’t necessarily mean the end of the world for big-cap tech, it’s just to say that the current state of affairs isn’t going to last much longer.
Next week brings a big test, as earnings come rolling in. Last year was the opposite of 2018 in terms of the juxtaposition between stock returns and earnings growth. In 2018, profits soared thanks to the tax cuts, but stocks fell. In 2019, earnings growth was sluggish and eventually turned negative, while equities had one of their best years on record. This dynamic is even more pronounced in tech:
If anything about next week’s deluge of reports from the heavyweights underwhelms (and there are all manner of fronts on which things could go awry given the dizzying hodgepodge of metrics on which these companies are judged), it’s not difficult to envision a couple of rough sessions, especially considering how extended the space is.
Assuming next week brings more scary pandemic headlines, any swoon would be commensurately exacerbated by a negative macro narrative.
Of course, the behemoths are going to keep growing earnings, and even if a given set of numbers is “disappointing” versus analyst expectations, the figures will still underscore the notion that everyone’s favorite tech giants effectively print money.
The problem is as follows (as communicated to Bloomberg by Charles Schwab’s vice president of trading and derivatives): “The market isn’t going parabolic, but some of these tech stocks really have. If you miss the bar, you’re going to get punished, no question about that”.
Coming full circle, if we’re right back here next Saturday with the Nasdaq 100 sitting at new record highs, it won’t mean that anyone made a “good’ decision to buy tech stocks that have recently gone parabolic. It’ll just mean that sometimes, bad decisions are rewarded.