The once high flying tech sector has endured a heavy selloff this 12 months amid concerns that the sector’s growth might be curtailed by rising rates of interest. The tech-heavy Nasdaq Composite is down greater than 14%.
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Lots has modified in technology for the reason that dot-com boom and bust.
The web went mobile. The info center went to the cloud. Cars are actually driving themselves. Chatbots have gotten pretty smart.
But one thing has remained. When the economy turns, investors rush for the exits. Despite a furious rally on Thursday, the tech-laden Nasdaq finished within the red for a fourth straight quarter, marking the longest such streak for the reason that dot-bomb period of 2000 to 2001. The one other negative four-quarter stretch within the Nasdaq’s five-decade history was in 1983-84, when the video game market crashed.
This 12 months marks the primary time the Nasdaq has ever fallen all 4 quarters. It dropped 9.1% in the primary three months of the 12 months, followed by a second-quarter plunge of twenty-two% and a third-quarter decline of 4.1%. It fell 1% within the fourth quarter due to an 8.7% drop in December.
For the complete 12 months, the Nasdaq slid 33%, its steepest decline since 2008 and the third-worst 12 months on record. The drop 14 years ago got here throughout the financial meltdown attributable to the housing crisis.
“It’s really hard to be positive on tech at once,” Gene Munster, managing partner of Loup Ventures, told CNBC’s Brian Sullivan on Wednesday. “You’re feeling such as you’re missing something. You’re feeling like you are not getting the joke.”
Aside from 2008, the one other 12 months worse for the Nasdaq was 2000, when the dot-com bubble burst and the index sank 39%. Early dreams of the web taking on the world were vaporized. Pets.com, infamous for the sock puppet, went public in February of that 12 months and shut down nine months later. EToys, which held its IPO in 1999 and saw its market cap grow to almost $8 billion, sank in 2000, losing just about all its value before going bankrupt early the subsequent 12 months. Delivery company Kozmo.com never got its IPO off the bottom, filing in March 2000 and withdrawing its offering in August.
Amazon had its worst 12 months ever in 2000, dropping 80%. Cisco fell 29% after which one other 53% the subsequent 12 months. Microsoft plummeted by greater than 60% and Apple by over 70%.
The parallels to today are quite stark.
In 2022, the corporate formerly referred to as Facebook lost roughly two-thirds of its value as investors balked at a future within the metaverse. Tesla fell by the same amount, because the carmaker long valued like a tech company crashed into reality. Amazon dropped by half.
The IPO market this 12 months was non-existent, but lots of the corporations that went public last 12 months at astronomical valuations lost 80% or more of their value.
Perhaps the closest analogy to 2000 was the crypto market this 12 months. Digital currencies Bitcoin and ether plunged by greater than 60%. Over $2 trillion in value was worn out as speculators fled crypto. Quite a few corporations went bankrupt, most notably crypto exchange FTX, which collapsed after reaching a $32 billion valuation earlier within the 12 months. Founder Sam Bankman-Fried now faces criminal fraud charges.
The one major crypto company traded on the Nasdaq is Coinbase, which went public last 12 months. In 2022, its shares fell 86%, eliminating greater than $45 billion in market cap. In total, Nasdaq corporations have shed near $9 trillion in value this 12 months, based on FactSet.
At its peak in 2000, Nasdaq corporations were price about $6.6 trillion in total, and proceeded to lose about $5 trillion of that by the point the market bottomed in October 2002.
Don’t fight the fed
Despite the similarities, things are different today.
For probably the most part, the collapse of 2022 was less about businesses vanishing overnight and had more to do with investors and executives waking as much as reality.
“Should you’re looking solely at future money flows without profitability, those are the businesses that did very well in 2020, and people should not as defensible today,” Shannon Saccocia, chief investment officer of SVB Private, told CNBC’s “Closing Bell: Extra time” on Tuesday. “The tech is dead narrative might be in place for the subsequent couple of quarters,” Saccocia said, adding that some parts of the sector “could have light at the tip of this tunnel.”
The tunnel she’s describing is the continuing rate increases by the Fed, which can only end if the economy enters a recession. Either scenario is troubling for much of technology, which tends to thrive when the economy is in growth mode.
In mid-December, the Fed raised its benchmark rate of interest to the best in 15 years, lifting it to a goal range of 4.25% to 4.5%. The speed was anchored near zero through the pandemic in addition to within the years that followed the financial crisis.
Tech investor Chamath Palihapitiya told CNBC in late October that greater than a decade of zero rates of interest “perverted the market” and “allowed manias and asset bubbles to construct in each a part of the economy.”
Palihapitiya took as much advantage as anyone of the low-cost money available, pioneering investments in special purpose acquisition corporations (SPACs), blank-check entities that hunt for corporations to take public through a reverse merger.
With no yield available in fixed income and with tech attracting stratospheric valuations, SPACs took off, raising greater than $160 billion on U.S. exchanges in 2021, nearly double the prior 12 months, based on data from SPAC Research. That number sank to $13.4 billion this 12 months. CNBC’s Post-SPAC index, comprised of the biggest corporations which have debuted via SPACs within the last two years, lost two-thirds of its value in 2022.
SPACs slumped in 2022
CNBC
‘Bargain basement’ shopping
Predicting a bottom, as all investors know, is a idiot’s errand. No two crises are alike, and the economy has modified dramatically for the reason that 2008 housing collapse and much more for the reason that 2000 dot-com crash.
But few market prognosticators expect much of a bounce back in 2023. Loup’s Munster said his fund is holding 50% money, adding that, “if we thought we were at the underside we might be deploying today.”
Duncan Davidson, founding partner of enterprise firm Bullpen Capital, expects more pain ahead as well. He looks on the dot-com era, when it took two years and 7 months to go from peak to trough. As of Friday, it has been just over 13 months for the reason that Nasdaq hit its record price.
For personal equity investors, in 2023, “I feel we’ll see a variety of bargain basement snarfing up of corporations,” said Davidson, who got began in tech investing within the Nineteen Eighties. To get to the market bottom, “we can have two years to go,” he said.
