Safety in Numbers
Well, that was scary… My heart was going pitter-patter pitter-patter.
Let’s all just take a moment to pat ourselves down, check for flesh wounds and remind ourselves that we still have our health and good looks.
I am, of course, referring to the hefty shelling the US tech sector has endured over the last few weeks.
For what has been the flavour of the last two decades, we’ve all just had a stark reminder that stonks don’t always go up and that volatility is all part and parcel of investing.
From their February highs, some of the casualties include (at the time of writing) Tesla (-20%), Zoom (-24%) and Palantir (-34%).
So, what an earth triggered this sell-off and is there more to come?
To gain a quick understanding as to how investors got themselves into a tizz-wizz of late, let’s do a very quick 101 on bond yields and why they can occasionally throw the market a curveball.
Bond yields have long been forgotten because of their ill-equipped capability to provide anything which resembles a noteworthy return.
And thus, market participants have had their hand forced into buying asset classes such as equities and even crypto currencies to get more bang for their buck. If the risk-free rate of return is offering you diddly squat, then ya may as well take a spin on the roulette tabl… Sorry, I mean equities!
However, as the economy starts to heat up again the possibility of increased inflation moves up too. And this alone can trigger a chain reaction in a thought process which goes a little something like this;
‘If inflation spirals out of control, then surely interest rates will have to go up to incentivise people to keep their hard-earned cash IN the bank to slow the velocity of transactions and, in turn, slow inflation. If interest rates go up, then the yield on a US government bond is less competitive. This means bonds will sell off, which lowers the bond price but increases the yield to keep it competitive. And if I’m now getting improved returns from interest earned in the bank or through the higher bond yields which are risk free, then why the hell do I need to stick my chips into higher risk assets like equities?’
That’s the boring part covered at least!
So now we’ve covered the ‘why’ part, next up is the… Is there more squeaky bum time to come’?
Well, it’s not completely out of the question. But we’ve just heard Jerome Powell, Chairman of the Federal Reserve, give his assurances that he has no intention of hiking interest rates anytime soon. Not at least until the US sees ‘full employment’.
“And with that, I’d like to turn our attention to some of the companies who remained more resilient during this recent correction. The ones who didn’t drop off a cliff edge at the first sign of trouble.”
My take?
So, what if inflation moves up a touch? Or even more than a touch as we move a step closer to full employment.
If we’re inching closer to full employment (and in turn, higher inflation) does this negatively affect Apple’s ability to sell a record number of iPhones or Amazon’s world domination? Unlikely.
It’s important to be able to differentiate between market noise and the actual company results of what you’re invested in.
As Jeff Bezos has rightly cited in 2018, the company is not the stock and the stock is not the company.
But if this recent sell-off is enough to keep you awake at night, then it might be in your best interest to turn your attention to the tried and tested market players who’ve experienced much worse than this and stuck the course.
You see, after such tremendous market corrections I notice a lot of investors seek out the worst affected companies and automatically assume they’ll present the most upside on the return journey.
Which I think is slightly short-sighted and discounts the volatility risk. It’s all well and good hoping that this is the bottom, but what if it’s not and you prematurely pile into a stock which has further to go down? It’s always worth remembering, if a stock goes down 50%, it’ll need to increase 100% to get back to square.
And with that, I’d like to turn our attention to some of the companies who remained more resilient during this recent correction. The ones who didn’t drop off a cliff edge at the first sign of trouble.
Those being Apple, Amazon and Google.
I’m not going into the credentials of each company one by one, but instead just note they share three outstanding qualities which mustn’t go unnoticed:
1 - Tried & Tested
New market players can dazzle upon entrance, but have they survived a dot com crash?
This isn’t the first time the market has been shaken up by interest rate woes, in fact it’s happened multiple times over the various recovery stages since the Great Financial Crash of 2008. And you know what - my newly, on the spot invented, AAG (Apple, Amazon and Google) index have always managed to go on and make new highs.
In some respects, you could almost suggest that they possess defensive qualities like supermarkets or tobacconists. Through the good times or bad, we’ll still need to do our weekly shop and smokers will keep smoking.
And likewise, Google’s last two quarters of 2020 which you’d think would have been affected by the pandemic actually saw total revenue increase by +14% and +23% quarter on quarter vs the same 2019 pre-pandemic numbers.
Apple and Amazon also saw notable top-line revenue increase during (supposedly) tough economic times.
2 - Market Dominance
Eye-watering valuations are usually awarded to freshly faced innovators who seek to ‘disrupt’ the market. And if they’re as pioneering as they say, then check back in 10 years when I’ll finally be writing about them.
However, are some of these new tech companies actually that pioneering? Or are they just traditional industries which have been facelifted with an app or an iPad?
I don’t want to launch into a complete diatribe on these new market constituents, but I think it’s worth taking a second look at their technology credentials.
Or as David Coombs, head of multi-asset investments at Rathbone, puts it; ‘People will be asking whether a business is really a tech company, or just a company, like Uber, that is enabled by an app. If it is a tech stock, is its business unique and if so, how much of a premium ought you to pay for this?’.
He continues: 'Tesla, although seen as a tech stock, is actually an electric car maker, and although other manufacturers are late to the party, they are catching up.'
This begs the question, is their barrier to entry that daunting?
And with that, sometimes it pays favour to side with an ally who’s created a moat in their respective field. The absolute best of the best at what they do.
You may be able to argue that what Amazon have achieved isn’t particularly new-wave or pioneering. It’s a book-seller turned global logistics company. But when you consider just how good they are at bringing all the components together and the infrastructure they’ve built, then I’d suggest their barrier to entry is more in line with Donald Trump’s early border wall Etch-a-Sketch.
3 - Cash
Imagine in life that your worst-case scenario is that you couldn’t sell another product for the rest of your life. No more sandwich board round your neck in the morning. You’re done kid, scramble!
But instead had to just survive on the little fortune that you had managed to amass. And heaven forbid that interest rates do go up - then you wouldn’t mind having $39bn in the kitty earning you interest every day like in the case of Apple.
Thankfully, their business model is slightly more progressive than just earning interest and paying it out to investors like some of Premium Bond. But it might offer some small level of relief to investors when the overall market is thumbling and probably plays a small part in why their share price has remained more resilient than most during turbulent times.
Above and beyond this, if the chips are down, their overflowing pools of cash can quickly be turned into a mergers and acquisition rainy day fund.
I recently wrote about London listed JD Wetherspoon due to their better than average cash position in a struggling sector, citing possible consolidation upside. And sure enough, soon after my piece, that’s exactly what they announced. Buying up pub freeholds at advantageous prices.
Apple, Amazon and Google should be no different. Possessing over $107bn between the three of them, the opportunity to snap up new contenders in any market slump should be seen as a blessing.
And with that, I find solace in numbers. 107,000,000,000 numbers to be precise.
I’m certainly not here to give stock recommendations, I’ll leave that down to you, the reader. However, did I stock up on Apple shares last week in the family portfolio? Yes.
If you’ve enjoyed this article and want to start your investing journey, feel free to reach out to me personally on t.sunderland@mittomarkets.com or call +44 (0)208 159 8985
Important Notice: When investing in shares, your capital is at risk. The value of the investment and any income from it can fall as well as rise, so you may get back less than your original investment.