I’ve got to admit that I have no idea what the editors of the Wall Street Journal were trying to accomplish with their most recent editorial on the recent ups and downs of the stock market:
Stocks bounced back Wednesday, but before that the tech-heavy Nasdaq had slumped 12% since its August peak. Falling FAANG stocks— Facebook , Apple, Amazon, Netflix and Google parent Alphabet—have swung the S&P 500 into a correction zone. Netflix tumbled 21% and Amazon fell 20% in October. Texas Instruments , IBM and Nvidia have also seen substantial stock price declines.
A tech revaluation was perhaps inevitable as prices leapt over earnings like LeBron James over Kevin Durant. Amazon’s stock in September was trading at nearly 160 times earnings, which wasn’t going to last. But what makes this month’s tech sale so jarring is that it comes amid strong quarterly earnings growth.
and
It’s not surprising that investors are struggling to price tech stocks properly amid this evolving regulatory and competitive landscape while factoring in stronger U.S. growth and rising interest rates. Big tech was one of the few industries that prospered during the economic malaise under Barack Obama and thus naturally attracted more investors.
Tech stocks also received a boost from the Fed’s monetary exertions that kept the federal funds rate at nearly zero for years and suppressed long-term rates with quantitative easing. Investors thirsting for higher yields piled into riskier assets, and some are now retreating as the Fed unwinds its balance sheet and raises rates.
This return to realism is unfortunate for some investors but shouldn’t undermine the larger economy. The S&P is still up 21% since January 2017. It isn’t bad news if investors steer more capital to other productive businesses that can propel American growth.
The facts of the matter have been quite obvious for most of the last decade. The stock market, particularly the major indices, have become virtually detached from the greater economy. The values of a handful of tech stocks are impossible to justify based on the companies’ performance or just about anything else. The runup in those stocks accounts for most of the increase in the major stock indices over the last decade. And reselling of stocks does nothing to “steer more capital to other productive businesses that can propel American growth”. Only initial stock offerings do that. What percent of the total trade in stocks does the initial market comprise? 1%? 2%?
What’s their point? What goes up come come down?
Keynes was right: investors don’t “struggle to price”, they struggle to get in on the action.
I’m not sure I’d be that harsh. It’s commentary on some topics that have gotten quite a bit of play here, all of which are factors affecting securities pricing: yield chase and Fed policy, the regulatory environment, what to pay for growth and the competitive landscape (by which I assume they really mean trade policy).
The free money environment that dominated the Obama years is over. People underestimate the effect of 2-3 (4?) interest rate discount points on the trade off between holding fixed income vs equities at their peril.
At least for now, the low growth general environment that characterized the Obama years is also over. I may disagree with, and I think you disagree with, the magnitude of the premium given to growth during that period. But growth was concentrated in those tech stocks and that’s why the premium. Growth is more broadly available now. It would take some work to figure out how much the indices (and therefore quoted PE multiples) were distorted by the high flyers.
The regulatory environment is probably best thought of as a factor in general growth, and the trade issues are overblown as of now, probably for political reasons. I don’t think they were simply saying what goes up must come down, but why.
Ben’s comment is good cynical snark, but off base. Investors spend inordinate amounts of time in price discovery. Its a separate question as to how well they do. But it’s speculators who just want to get in on the action, generally retail.