Lots of questions as enter this last week of January. The six month chart for the ETF that tracks the S&P 500 (SPY) is now pointing down; year-to-date we are looking at a loss of 9%, with the tech-heavy NASDAQ off 14%.
What might all of this portend for the next several months? Unfortunately this is very hard to predict, so for now we can look at the bullish and bearish cases for the market and try to judge for ourselves.
The bearish case has been the one before markets for the last few weeks: the Fed has abandoned pumping the market, and now comes the interest rate hikes, which will make borrowing costs higher for tech companies. Inflation will continue to be high and supply chains issues and energy costs will constrain growth.
Or we could look at the more bullish scenario: Fed moves are priced into the market, both in asset purchase tapering and interest rate increases, and the biggest tech companies like Apple and Microsoft remain profitable. Energy has already spiked and much of the inflation is going to wages, giving more spending power to consumers.
Even in the bullish scenario many of the tech startups and recent IPOs will continue to struggle as funding becomes more scarce; however their stock prices have already fallen pretty far and many have cash piles from the IPO boom: now many of these companies, including RobinHood (HOOD), Coinbase (COIN), Bumble (BMBL), Digital Ocean (DOCN), Squarespace (SQSP), CouchBase (BASE), and Block (SQ), will probably need to become consistently profitable a little earlier than expected in order to survive—and they have all now become takeover targets.
The tech giants have become targets themselves, with politicians pursuing numerous angles of attack. Google recently warned that the stupid proposals being considered now would make their product much worse for consumers, while Apple recently warned that the attempts by politicians to shoe-horn open iPhones for arbitrary outside developers would harm iOS security. These and other grandstanding proposals—led by dubious figures like Amy Klobuchar—are likely to go nowhere. Big tech should be regulated fairly, of course, but for now uninformed and vindictive politicians waste their time on non-issues and political grudges. For the foreseeable future, these companies will remain the cornerstone of the market.
Is this the time to “buy the dip?” I am very hesitant to say that it is. You might want to bargain hunt on a stock or two but I plan to be very restrained. Despite my sense that the market could be near a bottom for now, I might wait until the market gets its balance back or whatever—the last few trading sessions have been volatile and the market remains chaotic. While I think that there is value in the market right now on a fundamental level, the recent chaos seems to be driven by some wild and unmoored sentiment that can be hard to predict and this one can get away from you pretty quickly. I would hold for now.
Disclosure: Through personal holdings that I control and through investment LLCs in which I am a partner, I buy, hold, and sell stocks, bonds, ETFs, options, NFTs, and cryptocurrencies, not limited to but including some of those discussed in this newsletter.
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