Is this a tech meltdown? … how we’re in a “bear market for humans” … a tale of two media companies … not falling into the Technochasm
Are we watching the beginning of a tech meltdown?
If we go purely by the charts, as of the end of last week, the Nasdaq was down 10% since 9/3. That put it into official “correction” territory.
There was also a psychological defeat last week when Nasdaq-bulls attempted a rally on Wednesday, only to be beaten back down by the bears on Thursday and Friday.
However, as I write Monday morning, the bulls are hammering back, with the Nasdaq up 2.3%.
So, where does the tech sector stand today?
Let’s jump straight to our macro specialist, Eric Fry, editor of Fry’s Investment Report:
We’re all more than a little nervous after the coronavirus pandemic plunged us into a recession back in March … but this past week’s sell-off was the normal “churn” of investors taking profits in one sector and putting their cash to work somewhere else.
The outlook for the technology stocks we follow here remains as bright as ever.
But this doesn’t mean there isn’t a bear market taking shape …
It’s just this bear is happening somewhere you’re not expecting it.
Back to Eric:
… we are in the middle of, as one investment strategist recently put it to Bloomberg, a “bear market for humans.”
While this doesn’t sound all that great, Eric notes that it’s likely the biggest reason why the bull market for tech stocks is going to continue.
***One bear market is great for tech stocks
If you’ve been a part of the corporate rat-race, you’ve likely heard the worn-out phrase, “do more with less.”
This managerial mantra came from a simple idea — employees are costly, so many have been cut to improve company margins. The fewer employees that remain now have to “do more” to offset the decreased manpower.
Back to Eric:
Pre-COVID-19, “doing more with less” usually meant some layoffs in order to save a few bucks.
Post-COVID, layoffs and furloughs became essential for survival, and they ramped up big time … with U.S. unemployment reaching Great Depression levels during the worst of it.
But mass layoffs were devastating for brick-and-mortar retail, hospitality, and other businesses that need full-time employees to run effectively.
On the other hand, the technology sector barely skipped a beat. It was able to survive, and even thrive, because of the fact that it requires relatively few people to flourish.
The biggest and best performing technology firms simply don’t need as many employees as the “dinosaurs” of the old economy.
Eric notes that the takeaway was simple: bricks ‘n mortar stores had to lay off employees, shut down locations, and go without revenues; meanwhile, tech companies sent their employees home — where they could safely continue working, and making the company profits.
***The glaring discrepancy in fortunes
The simplest way to see how this “bear market for humans” impacts the stock market is by comparing the Dow Jones with the tech-heavy Nasdaq 100.
For any readers less familiar, the Dow includes a range of companies, most of them falling into the “blue chip” camp — think Disney, Exxon, and Microsoft.
There’s some tech exposure with Microsoft (among other tech plays like Apple), but there are more “old school” businesses in the Dow. That’s because the Dow is intended to do a better job of representing the broader economy than the Nasdaq 100, which is nearly all tech.
Below you can see the Nasdaq 100’s current top-10 weightiest holdings.
Below, we compare the Dow with the Nasdaq 100 here in 2020 … old-school versus new-school … humans versus tech … brick ‘n mortar versus the cloud …
Despite the tech-correction we’re experiencing, the Nasdaq 100 is still up 30% on year, having topped more than 40% as of just two weeks ago.
Meanwhile, the Dow is still down 2% on the year.
***To what degree is this divergence in fates based on employees?
Back to Eric:
According to a recent analysis by Vincent Deluard, director of global macro strategy at brokerage StoneX Group Inc., firms that rely least on their employees have beaten more labor-intensive ones by 37 percentage points in 2020. Here’s what Deluard told Bloomberg:
“I would summarize 2020 as the bear market for humans … Like many things, COVID is just accelerating social transformation, concentration of wealth in a few hands, massive inequalities, competition issues, and all that.”
As humans disappear from the workforce, the rich get richer … and tech companies get richer.
That’s the “Technochasm” we talk about so much here.
For newer Digest readers, the Technochasm is a term Eric coined. It describes the sharp, and growing, wealth divide in our world that’s being driven by technology.
In short, the Technochasm fuels a wealth-transfer, benefiting a select group of technology business owners, key employees, and investors.
In Eric’s update, he provides the chart below, illustrating the wealth gap accelerating over the last 40 years.
***Netflix and Comcast — a tale of two companies
In Eric’s update, he returns to Vincent Deluard, who sees such a strong correlation between “fewer employees” and “more profits” that he developed an employee-to-innovation formula that he uses to identify the best stocks.
Here’s how Bloomberg describes the formula:
Deluard divided the S&P 500 into deciles based on a measure he calls “market value of intangible assets per employee” — the price of a company’s intellectual property and brand recognition compared with the number of people employed.
The cluster with small numbers of employees relative to company value has returned 18% this year. The group with the highest labor intensiveness has seen a 19% loss.
To illustrate this correlation, Eric compares Netflix and Comcast in his update:
Take Netflix Inc. (NFLX) as an example. The company employs just 8,600 people, and it’s up nearly 60% year-to-date.
Comcast Corp. (CMCSA), which owns Netflix competitor NBCUniversal, has nearly 190,000 employees. It’s down 0.75% over the same stretch.
(Companies like Netflix) are generating bigger returns with fewer employees, and that means more profits …
Netflix ranks No. 2 on Deluard’s list. Not surprisingly, “a mix of financial, retail, and energy firms” come in last.
This divergence in fates becomes even more exaggerated if we compare Netflix and Comcast over a longer period.
Over the last three years, Netflix is up 165% while Comcast is up just 24%.
That’s a domination of nearly 6X.
That’s the Technochasm.
To see Eric’s entire research presentation on the Technochasm and its potential impact on your portfolio, click here.
Bottom line — tech’s upward march isn’t over. Prepare yourself for even bigger gains to come.
Here’s Eric with the final word:
… dumping Wall Street’s “dinosaurs” and investing in technology is the only way to not get stuck in “the Technochasm).
Have a good evening,
Jeff Remsburg
