3 reasons why this is not another ‘tech bubble’

Some suggest that this is the beginning of another dramatic sell-off, similar to the spring of 2000, when the “tech bubble” burst. I really doubt it. Yes, this selloff was significant, and I wouldn’t be surprised to see it continue for days to come. However, I warned a few weeks ago that we should be prepared for the possibility of a sell-off after such a strong rally. I think of this loss not so much as a correction, but as a digestion given that the NASDAQ Composite rose more than 60% from its March low in the course of less than six months.^one All things considered, I think this is a healthy period of consolidation after a dramatic run.

Here are three reasons why I think tech stocks are not experiencing another burst bubble:

1. The current interest rate environment is very different

First, the interest rate environment is very different in 2020 than it was in 2000. Remember that in the summer of 1999, the Federal Reserve (Fed) began to raise rates. In March 2000, the effective federal funds rate was 6.17%.^two After stocks started to fall, the Fed kept raising rates. In June 2000, the effective fund rate was 6.86%.^two

In contrast, the effective federal funds rate in August 2020 was 0.10%.^two And we just heard from Fed Chairman Jay Powell in his Jackson Hole speech that the Fed is changing its inflation targeting policy to be even more accommodative. In other words, this is a very different monetary policy environment than what we saw in 2000 when the tech bubble burst.

2. Key themes can support long-term technology growth

The technology sector has benefited from several key themes that have emerged in the pandemic, and I think many of those themes are likely to be enduring:

• Theme “Being at home”. Spending more time at home is perhaps the most obvious issue to come up in the pandemic. This includes those who work from home, are home schooled, and / or exercise from home. I think of it as a much broader version of the “nesting” theme experienced in the United States after 9/11, when many Americans feared travel due to terrorism and spent much more time at home. Today, many people around the world are spending money to renovate and adapt their homes to their needs, and companies are spending more on technology to ensure that employees can work efficiently from home. In my opinion, recipients have included a variety of technology companies, especially software, storage, and security, as well as home improvement companies, online education companies, and digital health companies. All of these topics should endure after the pandemic, in my opinion, although with varying degrees of popularity (online education is the least popular given the difficulties associated with learning at home for children; I can attest to this conclusion personally) .

• Electronic commerce Buying products online is a long-term trend that accelerated dramatically during the pandemic for obvious reasons. The security and ease of pressing a button at home and receiving merchandise at the front door has proven to be indispensable during the pandemic. We expect the types of goods and services sold online to expand as the pandemic continues. Even when the pandemic is over, e-commerce retailers are likely to retain a much higher proportion of overall retail sales than the pre-pandemic.

• Artificial intelligence. Artificial intelligence is a powerful innovation and, in my opinion, its demand has only accelerated during the pandemic. For example, imaging methods and tools that use artificial intelligence are increasingly useful in detecting and treating COVID-19. More generally, artificial intelligence is helping many companies become more efficient and work smarter in this difficult environment. Natural language processing (NLP) is a subset of artificial intelligence that deals specifically with interactions between human linguistics and computers, such as speech recognition. Artificial intelligence has the potential to dramatically improve productivity, so I think it can be a powerful trend that has staying power beyond the pandemic.

• Automation: drones and robots. The pandemic has underscored the need for robots and drones to perform essential tasks without the possibility of contracting or spreading the virus. For example, the more robotics on an assembly line, the less vulnerable it is to shutdown due to COVID-19. Similarly, drones are being developed to deliver goods, which would also help reduce the vulnerability of an essential service during a pandemic. Beyond the pandemic, automation is likely to accelerate further due to the productivity improvements and profitability it provides.

• Financial technology. Another trend that has received increased attention during the pandemic is cashless payments. The spread of COVID-19 has decreased the use of cash due to concerns that the physical exchange of money could spread the virus. Several financial technology (fintech) companies have benefited from this trend, which is likely to continue after the pandemic. In my opinion, a notable fintech beneficiary of the pandemic should be blockchain, which has applications in many different industries and can help facilitate contactless commerce. For example, public land records can be digitally recorded via the blockchain, reducing the need for physical record examinations as part of a title search. While this is particularly useful in a pandemic, it can also be more efficient, which means that it is likely to be a continuing trend. Interest in tokenization and distributed ledger technology has also increased.

3. Progress is made in the fight against COVID-19

No, I am not one of the bright-eyed optimists who believes that a vaccine will be available for distribution on November 1 (my guess is that an effective vaccine will be distributed next summer). However, advances in therapies are certainly being made to reduce the severity of the new coronavirus. The World Health Organization (WHO) made a major announcement last week based on evidence from several recently published clinical trials. The WHO recognized the efficacy of steroid use in reducing the severity of COVID-19 and recommended that doctors use steroids to fight the virus in severe cases.

Overall, doctors and hospitals have learned a lot from fighting the virus so far, and that knowledge has already reduced death rates; Just consider how much higher the death rate was in the northeastern US in March and April compared to death rates in other parts of the United States in late spring and summer. In my opinion, that should be positive not only for the economy, but also for stocks in general.

conclusion

In short, there are important reasons to be positive in the technology sector, in my opinion. That doesn’t mean there won’t be more days of lower or higher volatility, but I believe in the longer-term outlook for the sector. And I think the bias remains bullish for risk assets in general due to the extremely accommodative monetary policy of central banks around the world, but especially the Fed.

Footnotes:

^one Source: Bloomberg, LP From March 23 to September 2, 2020

^two Source of all federal funds rate numbers: Economic data from the Federal Reserve

Important information

Blog header image: David Malan / Getty

Every investment involves risk, including the risk of loss.

The NASDAQ Composite Index is the market capitalization-weighted index of approximately 3,000 common stocks listed on the Nasdaq Stock Exchange.

The federal funds rate (or federal funds rate) is the rate at which banks lend balances to each other overnight.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which can reduce the value of issuers.

Risk assets are generally described as any security or financial instrument, such as stocks, commodities, high-yield bonds, and other financial products that carry risk and are likely to fluctuate in price.