Today’s price action in technology stocks ($COMPQ) offers us one oversized takeaway – an increased recession scare and a lower chance of the mythical “soft landing.”
Remember, for so long, trading models priced in almost no recession in 2024 and that has quickly changed recently with souring fundamentals.
That’s why Airbnb (ABNB) was down 7% yesterday, not because more people will travel in 6 months, but less.
Whether a recession will hit or not is a big deal, because consumers and corporations tighten up purse strings and contracts don’t get done.
That means a reduced budget for cyber security, cloud space, semiconductor chips, and less money to buy iPhones.
What are some of the warning signs I am talking about?
An entrenched inflation problem which many would agree has been incredibly sticky.
Price inflation soared to a four-decade high in the summer of 2022. While it has cooled in recent months, the CPI began creeping up again in July and continued to rise in August.
The second canary in the coal mine is an inverted yield curve.
This happens when longer-term bonds offer higher yields than short-term bonds.
A 10-year US Treasury generally features a lower yield than a 30-year.
When this reverses and short-term bonds start yielding more than long-term bonds, it’s called a yield curve inversion.
Traders still expect the front end of the curve to drop which will result in the Fed cutting rates to save the day.
Until then, there is no reason to borrow at 30-year durations when investors aren’t rewarded and capital projects are harder to finance when 30-year rates are artificially expensive.
The US Federal Reserve has hiked rates by more than 5% in just 18 months, but it hasn’t had the desired effect because fiscal spending is out of control.
The economy is built on a foundation of cheap money. It’s not just the economy; it’s every facet of it.
The government, the deficits, and the government budget are built on cheap money. And it’s not just the federal government that’s been gorging on this cheap money.
Tech stocks have every reason to want a soft landing to happen or an orderly, short, and shallow recession.
Panic and chaotic unwinding can result in scaring away the dip buyers and after that, it’s free fall.
As volatility creeps up, tech investors need to be on red alert to observe whether fear and panic manifest inside the price action of tech stocks.
If Apple (AAPL) could pull itself out of the short-term doldrums, that would go a long way to delaying the 2024 recession since it comprises a big chunk of tech indices.
Right now, I believe the consensus is a short recession at the end of 2024 and what occurs in the next 2 months will tell investors whether that is moved up or moved back.
If a hard landing rears its ugly head, smaller tech stocks will get hammered.
I have no doubt that these smaller balance sheets won’t be able to endure the roughness of market mayhem.
It could all lead to smaller tech firms selling themselves at fire sale prices to tech behemoths for pennies on the dollar making big tech even bigger.
In the short term, sell any rip in small tech like Zoom Technologies (ZM) and buy and buy large dips in big tech.
