Have Tech stocks gone on sale?
With the sell-off in bubble assets beginning to broaden out and accelerate this year, many pundits are suggesting the bubble has already deflated. This sentiment is understandable given that the broad technology focused indices are well into correction territory. Beneath the surface, nearly 70% of technology stocks are in a bear market, with almost one-third down over 50% from their highs. Just a couple months ago, many investors were falling over themselves to pour more money into the NASDAQ 100 at 16,000. So with the index now trading closer to 14,000, it is not surprising that it appears to some like a significant buying opportunity. History says it may still be too early.
Most Tech stocks are already in a bear market
Content continues below advertisement
Following the peak of the Tech Bubble in March of 2000, a combination of peaking growth and tightening liquidity swiftly pushed tech stocks into bear market territory, and within just two months of the peak, over 90% of the sector was in a bear market and nearly 70% were down over 50% (Chart 1). Perversely, the mother of all dead cat bounces resulted in tech stocks rebounding more than 30% and recovering nearly two-thirds of those initial losses. Many investors were enticed to jump back into these stocks, only to be followed by another 82% decline over the next two years (Chart 2).
How will we know when the bubble has deflated?
During the prior Tech Bubble collapse, the Tech and Telecom (now renamed Communication Services) sectors went from a combined weight of 41% of the S&P 500® to a low of 16% in 2002. Despite the significant underperformance of Tech and Communication Services in this correction, the combined weight of these two sectors has decreased only from 40% to 38% (Chart 3).
Here are several signposts that might be helpful to determine when the bubble is truly deflated:
- Valuations will significantly contract, and the IPO market will enter a cold period.
- Tech and cryptocurrency analysts will go from heroes to villains.
- The number of technology-focused investment products, such as ETFs, will shrink.
- Business media will cancel TV segments and news columns dedicated to technology and innovation.
- People will no longer quit their jobs to join early-stage start-ups or to trade cryptocurrencies.
- No one will care about reading a report like this about when the bubble has deflated.
Dan Suzuki, CFA
Deputy Chief Investment Officer
Please feel free to contact your regional portfolio specialist with any questions:
Phone: 212 692 4088
Email: sales@rbadvisors.com
For more information About Dan Suzuki, please click here.
Dan Suzuki is registered with Foreside Fund Services, LLC which is not affiliated with Richard Bernstein Advisors LLC or its affiliates.
Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. Such an offer or solicitation may only be made by delivery to a prospective investor of formal offering materials, including subscription or account documents or forms, which include detailed discussions of the terms of the respective product, vehicle, service or instrument, including the principal risk factors that might impact such a purchase or investment, and which should be reviewed carefully by any such investor before making the decision to invest. RBA information may include statements concerning financial market trends and/or individual stocks, and are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such. The investment strategy and broad themes discussed herein may be inappropriate for investors depending on their specific investment objectives and financial situation. Information contained in the material has been obtained from sources believed to be reliable, but not guaranteed. You should note that the materials are provided “as is” without any express or implied warranties. Past performance is not a guarantee of future results. All investments involve a degree of risk, including the risk of loss. No part of RBA’s materials may be reproduced in any form, or referred to in any other publication, without express written permission from RBA. Links to appearances and articles by Richard Bernstein, whether in the press, on television or otherwise, are provided for informational purposes only and in no way should be considered a recommendation of any particular investment product, vehicle, service or instrument or the rendering of investment advice, which must always be evaluated by a prospective investor in consultation with his or her own financial adviser and in light of his or her own circumstances, including the investor’s investment horizon, appetite for risk, and ability to withstand a potential loss of some or all of an investment’s value. Investing is subject to market risks. Investors acknowledge and accept the potential loss of some or all of an investment’s value. Views represented are subject to change at the sole discretion of Richard Bernstein Advisors LLC. Richard Bernstein Advisors LLC does not undertake to advise you of any changes in the views expressed herein.
