The tech selling pressure continues… historical perspective on the weakness… the future looks more like 2020 than you think… how and when Luke Lango sees the sector rotation turning back to tech’s favor

 

Double-down on innovation. Double-down on the future.

In 3 to 5 years, you’ll be very, very glad you did.

Those sentiments come from our hypergrowth investing expert, Luke Lango.

Last week, the Digest featured a running segment called “What the Bleep is Going On?” in which our analysts looked at the craziness of todays’ economic and investment climate, then gave their two-cents on how investors should respond.

Given Luke’s focus on technology-based hypergrowth stocks, his core perspective and advice could be summed up simply…

Stay-the-course.

Regular Digest readers know that Luke has been urging investors to remain calm during these recent months of weakness in tech stocks. And this hasn’t been easy.

As you can see below, the Nasdaq has done nothing over the last three months. Actually, let me rephrase that…

Since February 15, the Nasdaq has fallen more than 10%, rallied, fallen, and is now nearly 6% below its February high.

Meanwhile, the S&P has climbed 5%, and the old, stodgy Dow has popped nearly 9%.

As I write Monday around lunch, the Nasdaq is under more pressure, down about 1%.

In light of this, today’s Digest is for any tech investors who are getting jitters. We’re featuring additional commentary from Luke, from our “What the Bleep is Going On?” segment. It underscores why bailing on tech today could be a horrible decision.

I’m not saying don’t allocate some of your portfolio into value stocks that will benefit from the economic reopening. But borrowing on Luke’s work below – the future belongs to tech. Failure to position yourself for that will carry an enormous opportunity cost.

Let’s jump in for all the details.

***Putting technology’s weakness into historical perspective

For newer Digest readers, Luke is our hypergrowth expert, and the analyst behind Innovation Investor. His specialty is finding market-leading tech innovators that are pioneering explosive trends.

Let’s begin by revisiting research from Luke that reminds investors of the right way to view today’s softness in tech.

It turns out that in 14 of the past 18 years, the Nasdaq has outperformed the Dow.

The four exceptions were 2006 (amid soaring oil prices), 2008 (amid the Financial Meltdown), 2011 (amid sovereign debt crises), and 2016 (when Trump got elected).

If we narrow it down to the past decade, the Nasdaq has beat the Dow in eight of the 10 years.

Here’s Luke’s takeaway:

Technology dominating the world – and tech stocks dominating the market – is a secular trend.

It’s been happening, consistently and regularly, for two decades, and the dominance of tech is only growing, and growing, and growing.

But now, let’s turn to the last few months, over which the Nasdaq has dropped 5% while the Dow has climbed 9%.

So, what’s behind this?

Here’s Luke’s take:

Everyone has a different reasoning to explain the odd market gyrations of 2021, and sometimes, these explanations are quite wonky. But the true rationale is very, very simple and straightforward:

The stock market hit the fast-forward button in 2020, and the rewind button in 2021.

That is, during the Covid-19 pandemic, society glimpsed into the future – a future powered by technology, wherein folks work from home, shop online, drive electric cars, rely on clean energy, and watch Netflix shows. As society glimpsed into the future, investors responded by piling into the tech stocks that represented this future – stocks like Zoom, Shopify, Tesla, Enphase Energy, and Roku.

But now that pandemic is fading and the physical world is reopening, society is reverting back to its old ways – the old ways of working in an office, shopping at a mall, driving gas-cars everywhere, relying on coal power, and going to the movie theater.

As society is reverting back to its old ways, investors are ditching their tech stocks and piling into the old-school stocks that were the giants of yesteryear – stocks like Nordstrom, General Motors, Exxon Mobil, and AMC.

Luke points out that pent-up consumer demand is being unleashed on the things people haven’t been able to do for over a year – like go to malls, movie theaters, restaurants, and on vacations.

This is especially true following last week’s reversal from the Centers for Disease Control and Prevention suggesting that fully-vaccinated Americans can resume nearly all normal activities without a mask.

All of this “back out in the world” consumerism is impacting tech platforms.

Back to Luke:

But there’s only so much time in a day. So, the amount of time consumers are spending unleashing their pent-up demand is coming at the expense of time they were spending on technology platforms.

That’s causing revenue growth rates at old-school companies to accelerate in early 2021, while simultaneously causing revenue growth rates at tech companies to decelerate in early 2021.

Meanwhile, we have rising inflation, as we’ve highlighted many times here in the Digest.

Put all of this together, and you have significant downward pressure on technology stocks.

***But here’s why bailing on the tech trade could cost you dearly

Earlier, we noted how the last 18 years have seen periods of Dow outperformance relative to the Nasdaq. Have we just entered one such period?

Perhaps, perhaps not. No one has a crystal ball.

But even if such a period is now upon us, and tech is fated to underperform for a stretch, a full-scale rotation out of tech and into bricks-and-mortar companies is likely to be a foolish decision.

Here’s Luke on “why?”:

This is going to end very badly for folks chasing the reflation trade.

The reality is that the future we glimpsed in 2020 is the actual future.

Most of the labor force will have work-from-home flexibility one day. Most shopping will be done online one day. All the cars on the road will be electric one day. The entire world will be powered by solar, wind, and hydrogen one day. And everything we watch will be from a streaming service one day.

It just happens that “one day” isn’t 2020 – it’s more like 2030.

Still, it’s going to happen.

The future is not going to be stopped. That future coming to life is as inevitable as the sun rising every morning.

Soon enough, Wall Street will realize this. In fact, they probably already do know this… but, in Wall Street’s true greedy fashion, they’re going to play the reflation trade for as long as it’s still working, even if everyone knows the ending is not going to be pretty.

No one knows how to time these things. It’s nearly impossible.

But if I had to wager a guess, I’d say things will change course in the summer once inflation cools off.

Things looks red-hot right now, comping against the year-ago period wherein the whole economy was shut down and as consumers are letting out all the pent-up demand. But as the comparable period gets tougher, as supply ramps back up, and as demand tapers off (the very definition of “pent-up demand” is that it is not sustainable), things will change.

Inflation will cool down. This vigorous economic recovery will lose steam. The growth resurgence in retail, energy, and financials will slow.

And, as all that happens, the reflation trade will end, and the growth/tech trade that has dominated markets for 20+ years will resume.

***Prepare for volatility, but keep focused on the future

We’ll likely see more inflationary spikes in the 10-Year Treasury (this is what investors tend to watch to gauge inflation) … that will most likely lead to more fear of rising rates from the Fed… which leads to a fear of depressed tech profits… which will lead to additional selloffs in tech stocks.

But remember – even if the 10-Year yield climbs, the Nasdaq will eventually acclimate and continue its long-term, upward march.

Luke is quick to remind readers of three such instances in which this exact dynamic occurred…

First was late January 2018. The 10-Year Treasury yield started spiking. The Nasdaq plunged. Yields stopped spiking by mid-February, and the Nasdaq rebounded.

Then, there was October 2016. Luke points out how the 10-Year Treasury yield began a sharp ascent. The Nasdaq panicked, and dropped. Yields stabilized by November, and the Nasdaq resumed its longer-term uptrend.

Finally, there was late June 2013. The 10-Year Treasury yield – which had been rising for months – accelerated its climb. Tech investors sold, resulting in a plunge in the Nasdaq. By July, yields were stable, and the Nasdaq was back to pre-crash highs.

Here’s Luke with what investors seem to have forgotten:

This happens. Quite often.

And it has – for the past 40 years – always ended with yields finding stability at some “going level,” and tech/growth stocks rebounding with vigor and resuming their long-term uptrend.

This time will not be different.

Bottom-line, there’s probably more pain ahead for tech investors, but beyond that is a reward for staying the course.

I’ll let Luke take us out:

The future is around the corner. Widespread disruption is coming. Technology is going to change everything about everything in the 2020s. A little interim stock market volatility doesn’t change anything about that.

I’m talking to the folks who are building electric cars, working on self-driving tech, coding next-gen digital platforms, creating new 3D printers, and more. Guess what they’ve been doing over the past few months? Working, hard as ever, on turning these technologies into disruptive realities – and they’re more excited and bullish about their potential than ever before.

Nothing has changed besides a few stock prices.

So, don’t get caught up in the noise. Worst thing you can do here is sell long-term winners in pursuit of near-term profits. That hasn’t worked out well for anyone, ever.

Instead, double-down on innovation. Double-down on the future. In 3 to 5 years, you’ll be very, very glad you did.

Have a good evening,

Jeff Remsburg