COVID was not just good for the stock market. It was a bull’s wildest dream. The pandemic dragged interest rates lower, spurred enormous amounts of government stimulus, and accelerated demand for products and services offered by the world’s biggest technology companies. The result was the biggest equity bubble since dot-com. It’s popping. The shock factor of COVID is nearly exhausted and the byproduct of society’s efforts to combat it is now the primary focus.
Next year should look very little like this past one, and the market is gearing up for that. It’s been a slow-moving but steady transition all year, as leadership in the market began thinning during the first-quarter spike in Treasury yields and hasn’t stopped since. If it weren’t for big-cap tech, the indexes would be in a very different place. But the past 10 days have really brought this looming post-COVID reality home. Most notable is the development that market participants now view Fed Chair Jerome Powell as being moderately hawkish in his approach to combat inflation, as traders raised the odds of interest-rate hikes next year after his reappointment. Haven’t heard much about average-inflation targeting lately…
Then, Zoom Video (NASDAQ: ZM) stock blew up on earnings that put the nail in its bearish coffin, sending the stock down 20% at the low and crashing through all areas of possible technical support on the chart. The King of Quarantine, down 65% from its record. Zoom is in the gutter alongside the entire SPAC trade (down 30%) and Cathie Wood’s beloved flagship of future tech, ARKK (down 32%). DraftKings stock is getting clobbered, and Coinbase couldn’t break out to a new record, just like bitcoin is struggling to do the same. The high-flyers of the COVID-era speculative mania are now crushing traders who didn’t get out in time. The mega-cap stalwart giants are doing just fine. Alphabet (NASDAQ: GOOGL), Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and Microsoft (NASDAQ: MSFT) are all just below records, but the destruction in Zoom Video is resonating throughout the cloud technology sector as a whole. Investors should watch this group carefully, as it’s fallen out of favor relative to more economically-sensitive chipmakers this month.
If cloud stocks enter a downtrend, Amazon and Microsoft will eventually follow. To me, the sector looks like a ticking time bomb. There’s immense competition, peaking demand, and a shocking lack of profitability. Growth rates across technology broadly peaked earlier this year. Add in the potential for rising interest rates and you have plenty of reason for valuations to continue contracting. This market has had fits and starts of unwinding COVID dynamics all year, but as I’ve written about extensively the past month, the breakout rally in the U.S. dollar tells us this time is different. The tide of liquidity is going out, not in. Prepare for volatility.
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