The most interesting thing about the Nasdaq crash is not that it was the most widely anticipated correction I’ve ever seen, but that it was completely isolated to US tech.
No other markets fell, and gold didn’t really respond. Is this an all clear to pile into cheap stocks elsewhere?
Or is this just the beginning of a wider downturn?
We know that the rally in stocks has been very limited in its breadth, with large cap well known US tech companies doing most of the running for the whole global stock market.
There are now crazy stats about Apple being worth more alone than the entire FTSE 100, and in fact Apple is the fourth largest economy in the world, after the US, Japan and China.
But the war is not yet won, and there is plenty of races yet to run.
Can the UK mount a comeback?
Here’s a chart of the Nasdaq (blue) vs the FTSE 100 (red) since Aug 1. What do you notice?
Well, what strikes me as surprising is that when the Nasdaq crashed, starting just over a week ago, the FTSE didn’t bat an eyelid. In fact, it’s actually up since the first day of the collapse.
It’s now clear that the stock rally has morphed into a US tech rally. Other global indices are still very firmly in bear market territory, and hardly any have surged past their post-Covid highs of June 8, over three months ago now:
At that point, the FTSE (red), the Nikkei 225 in Japan (green) and the Nasdaq (blue) had rallied with near-equal vigour.
And it was around that point that I felt the rally had really run its course.
But something strange happened then. Something that was harder to expect.
About ten or twenty stocks, large, US technology leaders, started surging to an extraordinary degree, drawing very apt comparisons to the madness of the tech bubble in 2000.
The market capitalisations of Facebook, Amazon, Apple, Microsoft and Google roughly doubled and now add up to just under $8 trillion.
With that going on, the greatest fear was that if that tech rally ran out of puff and collapsed, as it should/will/must, the contagion of fear and panic would spread to other markets, taking global stocks for a wild ride for the second time this year.
Other markets such as our own here in the UK hadn’t departed from reality, and were sensibly fumbling along well below the February highs before Covid struck the stock market.
So this was not actually a ‘crash’ per se, it was a rotation.
The FTSE was up (partly currency related as the pound was down which makes the FTSE 100’s large foreign earnings more valuable), and value stocks were actually up too. Here’s the growth vs value chart for America over the last year.
What a divergence there has been!
And this is why it’s so important to carefully pick out who and what exactly is driving the rally.
Because it’s not the UK and it’s not value stocks, which are often the same thing.
But if you believe that US tech is overheated, and you have the patience to wait for it to correct fully (I.e. far more than we’ve seen in the last fortnight), then you don’t just have to sit on the sidelines. You have other options to actively invest.
Gold is the traditional hedge (read more here ), but the last couple of weeks have offered a hint that maybe, just maybe, other equity markets won’t suffer too badly if the Nasdaq does start breaking hearts.
Remember, the last time US tech did this, it came crashing down to earth, at lightning speed.
Below is one of my favourite charts:
It shows how the Nasdaq (blue) fell almost ninety percent, and took an amazing fifteen years to recover its previous level, and that’s not even adjusting for inflation.
But how did the Dow Jones (orange) and S&P 500 (red) fare?
The Dow comprises more cyclical, industrial stocks, and so is the opposite of the Nasdaq while the S&P is somewhere in between.
The Dow Jones Industrial Average (DJIA – orange) fell only 25% from the Nasdaq’s peak in late 2000, and buying at the top would still have earned you a reasonable return of 30% six years later, not including dividends.
The S&P (red) meanwhile was a bit more mixed. Because it included many of the tech darlings of the Nasdaq, it fell more and took longer to return.
The bottom line is, signs of a rotation away from tech are gaining in regularity and magnitude, and you’d better not think the 2020s are just going to be a repeat of the 2010s.
Whether you think now is the time to buy or not, this is very helpful in terms of thinking about what comes next.
So many people just think the same regime will continue, even if markets crash the same stocks will win again in the next cycle.
They see Tesla, Netflix, Uber, Beyond Meat and co as the winners of the next decade, and they may well be. But given that they are mostly priced to win the whole century, investor preference is far more likely to give up on the stocks that will burn them so badly.
This is what happened in the early 2000s, investors just gave up because they had fallen so far and it hurt too much.
So in terms of thinking about your next moves, you want to look elsewhere. You want to look at other factors, other industries and other countries.
I may not be able to help you with timing. After all, just because something is overvalued it doesn’t mean it’ll go down tomorrow.
But if you’re comfortable ignoring the madness of the tech rally and thinking longer term, then I will continue to look at better places to put your money in the 2020s.
So cyclicals, value stocks, and the UK or other global markets could be worth our time, even while the Nasdaq remains at extraordinary levels.
All the best,
Editor, UK Uncensored
PS If you’re even more pessimistic, click this link here to read about other assets and strategies you can use to protect yourself from what I’m calling ‘Nasdaq contagion’ – where the collapsing tech bubble brings other stock markets down with it.