June Swoon in Tech Stocks. Should we be Worried?
The US NASDAQ 100 is down almost 4.6% since hitting its all-time high of 5885 on 8 June 2017, to close last night at 5646.
On the back of this sell-off, many commentators are suggesting that this could be the beginning of a major market sell-off and the end of the bull market.
A number of conditions have arisen recently that are fueling these concerns.
- High valuations in the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google (now Alphabet)),
- The “Sell in May and go away” factor, and
- The simple fact that it is 2017, and some very famous market sell-offs have occurred in years ending in “7”. NB: 1977, 1987 and 2007.
Collectively, these conditions have increased investor anxiety in recent weeks.
The problem is, bull markets don’t tend to end when everyone is fearful, they tend to end when there is an absence of fear.
So while we may see further softness in the months ahead, as the northern hemisphere money managers prepare for their summer entertaining season on their luxury yachts or at their Hampton beach houses, the question is, should we be running for the bunkers?
At UGC we don’t believe so…
Bull markets tend to end, and big busts tend to start, after we’ve seen a period of significant economic strength, which is often followed by a sustained period of monetary tightening, which often ends in an inverted yield curve. Consider this…
A strong global and local economy
You can’t have a big bust without first having the big boom. While economic conditions have been improving, we certainly haven’t seen the level of global economic growth that would tend to lead to the large excesses that tend to create the large economic bust.
Year- on-Year (YOY) GDP growth in all of the world’s major developed economies is well below the 3% and often 4% or 5% growth rates typically witnessed just before a major market top. The US is growing at just 2.1%, Euro Area 1.9%, Japan 1.3%, Germany 1.7%, United Kingdom 2.0%, Australia 1.7% and Canada 2.3%.
Hardly eye popping rates of growth.
A sustained period of monetary tightening
Because of the strong growth, central banks will tend to tighten monetary conditions until they break something in the economy. Most bull markets tend to end when interest rates have been raised to a level which is designed to slow down economic growth. With interest rates in the US at 1.25%, Euro Area 0.00%, Japan 0.3%, United Kingdom 0.25%, Australia 1.5% and Canada 0.5%, you could hardly call these tight monetary conditions.
What’s more, major bear markets almost always start when the yield curve inverts. That is, short term interest rates are higher than longer term interest rates. That’s clearly not taking place right now either.
Leading Economic Indicators
In addition to the above, you would also tend to see leading economic indicators start to soften. But that doesn’t seem to be occurring either. In both Australia and the United States, the Conference Board’s Leading Economic Index for both countries continue to hit new all-time highs and are in clear up-trends.
According to research conducted by Stansberry Research analyst, Dr Steve Sjuggerud, US stocks have increased on average by 8.4% per annum when the LEI is in an uptrend like it is today. It has returned just 2.4% per annum when it is in a downtrend.
So what does all this mean for investors?
At UGC we believe that it’s probably not a bad time to be booking profits or considering your portfolios overall exposure, especially to tech stocks. Make some adjustments where you feel you might be too overexposed. But don’t head for the bunkers just yet. While we can’t rule out a period of increased volatility in the months to come, as is typical around this time of year, it’s certainly not time to be ringing the bell on this bull market just yet.
If you want to know which stocks we’re recommending today, that have huge upside potential, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email [email protected] to learn about our Quality, Value, Trend (QVT) investment selection methodology.
The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs. When assessing any investment you should also consider that past performance is not a reliable indicator of future performance.