It’s been just under a year since the Nasdaq Composite’s short-term moving average slipped below its 200-day measure, marking an industry in downtrend. It had actually started to trail off towards the end of November 2021, prefiguring a peak-to-trough fall of 36 per cent, as the gains of the preceding year swiftly evaporated.
Yet the index’s decline, unsettling as it may have been, provides another sobering reminder of why it’s bad practice to abandon risk assets when fear grips markets. After all, the Nasdaq Composite has still delivered a 65.8 per cent capital return over the past five years, easily outstripping the S&P 500 in the process.
So, where are we now? The index recently closed out its fifth weekly increase in succession – its longest winning streak since the November 2021 high water mark – leaving it 11 per cent to the good in the year to date. The extent to which this reflects investors ‘buying the dips’ is anyone’s guess, but the rally is hardly justified based on recent earnings updates from US tech heavyweights Alphabet (US:GOOGL), Apple (US:AAPL) and Amazon (US:AMZN). Apple fell short of profit expectations for the first time in seven years, after China’s strict net-Covid policies stymied iPhone production at its biggest supplier, while Amazon is now recalibrating the scope of its business as the surge in order volumes brought about by the lockdowns has not been sustained.
More tellingly, perhaps, Alphabet reported that a pullback by advertisers continues to constrain revenues. There is some debate as to whether advertising spending represents a leading or lagging economic indicator, although it’s argued that the online space provides a more immediate and meaningful picture of where the economy might be headed. Softening advertising revenues certainly chime with the US consumer outlook. The latest Consumer Confidence Survey published by The Conference Board, a US think tank, certainly highlights a deteriorating consumer outlook for income, business and labour market conditions. But, then again, if leading indicators were as illuminating as some would have us believe, there would be far less volatility in markets, and future sales and cash flows could be predicted with greater accuracy.
Alphabet is one of a growing number of Nasdaq tech stocks that have taken the decision to cut job numbers. Google’s parent company is aiming for a 6 per cent reduction in the global workforce. The group’s chief executive, Sundar Pichai, explained that hiring policy over the past couple of years reflected a “different economic reality than the one we face today”. Cold comfort for anyone about to be shown the door, but the layoffs should support operating margins over the medium term. Without wishing to sound callous, investors in big tech must surely have been questioning labour utilisation rates in light of Elon Musk’s experience at Twitter anyway.
Perhaps the recent support for the tech complex assumes that the end of the US Federal Reserve's aggressive rate rise programme is within sight, a distinct possibility if the M2 money supply continues to dwindle. But that’s only part of the picture. Central banks on both sides of the Atlantic are committed to shrinking their balance sheets by no longer reinvesting proceeds from debt maturities, or, in the case of the Bank of England, selling them in advance of the maturity date. Unfortunately, equity valuations, particularly in relation to growth stocks, are vulnerable to the potential knock-on effects of “quantitative tightening” because a minimum level of bank reserves is required to keep short-term funding markets operating smoothly. The situation is also complicated by the brewing Congressional spat over the US debt ceiling.
The valuations ascribed to many Nasdaq stocks in the run-up to the bear market came about through excess liquidity in the marketplace, or dirt cheap capital, to put it another way. The average cyclically adjusted price/earnings (PE) multiple has shrunk by about a third since the last high point and has fallen below the five-year average. Yet US stocks remain overvalued when set against long-term multiples. It’s hard to square index performance when set against the flurry of recent earnings updates and the decline in consumer confidence, but expectations of a lower-than-expected peak Federal funds rate are holding sway. Whether this amounts to little more than a relief rally is unimportant, as the Fed’s measures to streamline its securities portfolio will have the most profound impact on market volatility in the coming months.
