Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 461

Is the speculative fever in 'hot stocks’ over?

Over two years from the Covid crisis in March and April 2020 to now, the market delivered price jumps in hundreds of tech stocks followed by a harsh reality check. The reasons for the surge in prices were simple: trillions of dollars sprayed around by governments, deficit spending their way to wartime-like debts, to boost incomes, save jobs, and encourage spending.

On top of this, central banks threw away their textbooks and set about to deliberately create inflation, cutting rates to zero (negative in Europe and Japan), and resorting to straight-out money-printing, to entice people to gear up to the hilt and spend. People everywhere threw their free or ultra-cheap money at just about anything, especially online retailing, tech, renewables, ‘crypto’ currencies, ‘NFTs’, and even boring old housing.

The days of reckoning

Here is a quick snapshot of the rise and fall (thus far) of the post-Covid tech fever. Below are price charts for a couple of dozen stocks since the start of 2020 – ie just prior to the February-March 2020 Covid sell-off. At the top we start with the broad US S&P 500 and NASDAQ indexes, then several US tech/online stocks, and some key stocks in other markets, including Australia. We also include some crypto’s, including the terraUSD ‘stable coin’.

We have used no charting trickery to make price moves appear greater than they actually are. On each chart, the left scale starts at zero at the bottom, so if a price looks like it has doubled, or trebled or risen ten-fold (like Tesla and Bitcoin), or has fallen by more than half (most of them), then they have.

This is not intended to be exhaustive. It is to illustrate that the patterns are virtually the same in each case, regardless of the circumstances or merits of each individual company (or crypto).

As almost none of them pay dividends, half make losses, and most of the rest make only tiny profits relative to their prices, the charts reflect the rise and fall of mass hysteria – first surging in, and then fleeing.

Will the hysteria return to drive prices higher?

Is this just a temporary dip that will recover, or will the mass-selling continue, or pause?

Sentiment changed in early 2022, and the reasons are also clear. It was the sudden realisation that the era of free and ultra-cheap money is over. Inflation surged well before Russia’s invasion, and central banks finally started to end QE money printing, and raise interest rates back toward more ‘normal’ levels. There is much debate about exactly where ‘normal’ is for cash rates in each country, but it is certainly much higher than where they are now.

The bell at the top of the market was probably the January 2022 Superbowl, dubbed the ‘crypto Superbowl’, which featured slick ads showing famous movie stars spruiking cryptos as a sure way to get rich. (This is fitting, as the bell at the top of the late 1990s ‘dot com’ boom was the January 2000 Superbowl, dubbed the ‘dot-com Superbowl’. It featured TV ads for 14 profit-less ‘dot-com’ start-ups that promptly crashed in the 2001-2002 ‘tech wreck’).

Will central banks suddenly switch back to rate cuts and QE? Not while inflation is running well above target, unless there is another major economic contraction (deep recession with high unemployment, like the in 2020). If that does occur, share markets would have already fallen and started to rebound by then. 

On the ‘fiscal’ (government spending and taxes) front, governments are still deficit spending, but the pace of spending increases has slowed significantly, and many programs have ended. Governments are under pressure to scale back spending, and are even talking of raising taxes (eg. tax hikes in Joe Biden’s election policy agenda).

Is pricing now more reasonable?

Has the recent sell-off brought prices back down to levels that are now ‘fair’ or reasonable (or perhaps even cheap?). Here are the price/earnings ratios and dividend yields for the broad market and for our tech/online stars:

On the left, we can see that price/earnings ratios are a not-too-expensive 21 for the US market as a whole. As a general rule of thumb, a P/E ratio above the high teens is getting expensive, and is only justifiable if the company can generate and sustain above-market profit growth well into the future. Here we see that the P/E ratios of the tech and online stars are well above that in almost all cases. Half of them make losses, so they don’t even have any ‘E’ (earnings) for us to calculate the P/E.

The current high pricing relies on assumptions of continued boom-time rates of profit growth, and many of these are going to be a lot more difficult to sustain as monetary and fiscal support is withdrawn, and as higher inflation and interest rates constrain spending, revenues, margins and profits.

The right chart highlights that there is almost a complete absence of cash dividends. This is important for the broader market, as the top half dozen stocks on the list are not just large tech/online stocks. They are the largest companies in the US market, and the largest in the entire world, so they drive global returns. (Australia’s Domino’s Pizza is seen as a hot tech stock for some bizarre reason, but it is by far the biggest dividend payer).

These numbers suggest profits need to remain strong (with inflation and interest rates not rising too high) or prices have further to fall.

 

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is for general information purposes only and does not consider the circumstances of any individual.

 


 

Leave a Comment:

     

RELATED ARTICLES

Gullible travels, or are Aussies more sceptical?

How much bigger can the virus bubble get?

We have many world best practice companies

banner

Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Taxation

Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Infrastructure

Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.