Guess, then, what’s super fashionable at the moment? Yes, it is the midi skirt (worn with boots — which apparently solves the bare legs or tights dilemma you didn’t know you had). I’m not a great one for fashion, but the falling hem has been so plastered over the fashion media that even I have just bought a pink pleated version.
Bear that in mind, if you will, as we look at this week’s tech-stock wreck. The Big Tech stocks that have led the bull market of the past decade, including Facebook, Apple, Amazon, and Netflix, are down more than 23% from their highs, while Google’s parent, Alphabet, is down 18%.
They have been joined by much of the rest of the sector, and in a particularly dramatic fashion by the most techie of all tech investments, cryptocurrencies. For most of those, 20% is a distant dream. The weakest have lost over 90% of their value in the past 12 months and even the strongest, including the original bitcoin, have lost 70% or so.
What’s going on?
Partly, what’s going on is nothing in particular. It is not news that most cryptocurrencies aren’t much good for much. Yes, the underlying technology could eventually transform our clunky and expensive global payments systems and bring the world’s unbanked into the global financial system (hooray to both). But that does not give much value (if any at all) to the currencies themselves. They turn out to be cumbersome, unstable, and too open to both manipulation and boring arguments among insider developers and “miners”.
It also is not news that the big tech companies aren’t actually a dream come true. They have had a wonderful time being the good guys in a low-interest rate, low-labour cost, low-regulation and nearly tax-free globalised world. And their embrace of all these things has been a main driver of the doubling of US profit margins in a decade.
But labour costs are rising and the threat of heavy-handed and locally differentiated regulation, combined with nationally based taxation of revenue, is no longer just a threat now that national sovereignty is back in fashion. That means the likes of Facebook are most definitely not the good guys any more. Anyone who didn’t know all of this even last year simply hasn’t been concentrating. They might even still be wearing mini-skirts, for all I know.
The other part of the answer is that over the past few years, everything has changed — not on a corporate level but on a global and macroeconomic level. We are, as Russell Napier of research firm Eric puts it, facing “a profound structural change to the nature of the global monetary system”. Quantitative easing is turning to quantitative tightening after a long period of rapid monetary expansion. “There is now no growth in world reserves and the US Federal Reserve is actively destroying [dollar] bank reserves,” he adds.
That is not necessarily a bad thing: the purpose of markets is to allocate capital efficiently, something it is very hard for them to do when pricing mechanisms are distorted by monetary policy. So it makes sense for central banks to back away from super-loose monetary policy and let the markets reprice themselves.
It also makes sense that investors think those assets are worth a lot less now that the price of borrowed money is rising. When money is more or less free, investors do not ask for much. Now they want more certainty that they are buying something of value.
In the old environment, no one was much bothered by mildly disappointing earnings or Apple’s announcement that it will no longer reveal how many iPhones it sells. In the new one, they do.
Nothing has changed – the things that used to matter still do
This year, a fund manager told me that younger analysts were downplaying traditional valuation metrics in favour of new ways of setting target prices for favoured stocks. Another told me that valuations were much less important than the extent to which companies had embedded digitalisation in their processes. I have lost count of the number of people who insist that macroeconomic trends and politics no longer matter.
In the old world, they were right. In this one, they are wrong. That is why emerging markets have fallen alongside tech stocks, and why none of them are likely to bounce back quickly. Tech stocks are still valuable over the long term, just not as valuable as last year’s cash-rich market thought they were.
Is it safe to re-enter the market? It depends on your mindset. If you insist on realistic valuations, any time is safe-ish. If you haven’t shed last year’s free-money mindset, you will not be safe until the Fed stops trying to “normalise” monetary policy. That is likely to be a good few seasons of midis and quite a lot of pain away.
• This article was first published in the Financial Times