Recently, an unexpected shift is happening within Wall Street’s technology sector, with previously high-performing stocks now plummeting in value. It’s hard to believe what we’re witnessing.
Take Facebook, for example. On February 19th, the social media giant acquired the messaging app WhatsApp for a staggering $19 billion. On that same day, Facebook’s shares closed at $68.06. We identified this moment as a potential indicator of a market peak, dubbing it the Mark Zuckerberg Indicator.
Initially, it seemed like Facebook’s ascent would continue unabated. However, by March 10th, the stock reached a peak of $72.03 but has since experienced a 21% decline, slipping into bear market territory.
Facebook isn’t alone in its struggle; many other tech companies are also facing significant stock declines. Companies such as Tesla Motors, Twitter, and Netflix have seen their shares drop by 15%, 20%, and 25%, respectively, over the past month. Similarly, Alexion Pharmaceuticals has suffered a decrease of over 15%. What’s behind this troubling trend?
The Allure of Shiny Objects
The recent bull market for stocks over the past five years has driven technology shares to considerable heights. They are currently priced at levels that many argue are unsustainable.
But how do we determine the appropriate value for such high-flying tech stocks? This is a complex question. When betting on burgeoning companies poised for explosive growth, the risk associated with high valuations can sometimes be justified by the potential for substantial returns.
Yet, investors often fall prey to overexuberance, bidding up prices to irrational levels. This collective enthusiasm can cloud judgment, elevating values into an unsustainable atmosphere.
In the rush to achieve quick wealth, many overlook the fundamental truth: there is no such thing as a free lunch. A market driven by speculation cannot maintain its pace indefinitely; eventually, it must confront the realities of valuation, leading to a swift recalibration of prices.
“There’s value somewhere, but since these things aren’t being traded off typical valuations, you can’t go by those metrics, and it’s more about when do you find that stability,” said Mike O’Rourke, chief market strategist at JonesTrading in Stamford, Connecticut.
Strategies for Future Gains
Currently, the situation surrounding the NASDAQ remains uncertain. After reaching a high of 4,357 on March 5th, the index has since dipped by 6.3%. Whether this downturn signifies a small correction or a longer-term trend is still up for debate. Could a decline in the NASDAQ also indicate potential trouble for the S&P 500?
“I’m not concerned about this spilling over to the broader market. We’ve been in a trading range, finding resistance at record levels, so this isn’t cause for alarm,” remarked David Joy, chief market strategist at Ameriprise Financial in Boston. However, conditions can shift quickly; what seems reassuring one day may appear alarming the next.
“If the weakness here cascades into other sectors, that would indicate a fundamental shift in the market. If things keep rolling over, you might want to seek protection or examine your fundamentals,” advised Michael Matousek, head trader at U.S. Global Investors Inc. in San Antonio.
From a fundamental perspective, technology stocks appear overvalued, and the broader market does as well. Presently, the S&P 500’s price-to-earnings ratio exceeds 18, while its long-term median sits at 14.54. Balancing these figures may require either a drop in prices or a rise in earnings.
Ultimately, timing is crucial when investing in stocks. The optimal moment to buy is when prices are low, not when they are inflated.
At this juncture, it seems wise to hold off on stock purchases. Maintaining a cash reserve and exercising patience may yield significant rewards in the aftermath of market corrections.
Sincerely,
MN Gordon
for Economic Prism
