The Stock Market Conundrum

I know I don’t write that often about stocks or the stock market. That being said, studying the business fundamentals and how the companies and markets we study are intertwined with stock price is always something I keep an eye on. I hate admitting this, but I read way more sell-side reports on the tech companies and markets I study than I probably should. But I often find data gems in these reports, even if the mining of them can be frustrating.

I have been having several conversations with investors, large and small, about what is happening in the market with tech stocks and, in particular big tech stocks. Big tech meaning Apple, Amazon, Microsoft, and Google mostly. But there is a conversation to be had about the whole of the tech sector and how it has not just been holding up but defying the typical things that would cause dramatic losses in the market. So the question is, why and longer-term is this a new reality or a short term moment investors are holding onto?

The World Runs on Technology
A common narrative I’m seeing from the buy-side analysts at banks like JP Morgan, Morgan Stanely, and UBS is a key difference in this economic situation than past recessions/depressions. The role of technology in the world has changed, and the realization is the modern world can not function without technology. Everything from devices, to telco, to software, to cloud platforms are now so deeply ingrained in modern business, and there is no longer any debate about the essential nature of technology. This point is being taken even further now with the rushing forward of digital transformation trends when many companies are now embracing technology solutions from devices, cloud, commerce platforms, SaaS, and more out of immediate necessity.

So many trends that most pundits thought were still a 4-5 year transition are happening now in less than six months. There is still room for growth around this concept of digital transformation, but the situation around COVID-19 has caused business to transform digitally much faster than they anticipated. And in this point, is the reality that all business are relying on technology more than they were last year, and the result is much higher dependence on the world of technology.

This was not true in prior economic downturns, and it appears the insulation of tech stocks, or any company that has a tech angle (see Disney with Disney+) is not just holding their ground but even seeing gains that defy the harsh economic realities and inevitable job losses, financial pain, worries of inflation, and decrease of countries GDP. In future downturns, this combination would have crashed the stock market, but instead, we are seeing the Dow jump 300 points on the same day job losses hit an 80-year record, which happened yesterday.

The Stock Market is Held Up by Tech
The point I made above about the world, and all business, being dependent on technology shows the shift from prior eras where the stock market is now held up and sustained by the tech industry. In past eras, the market was held up by different industries, from finance to manufacturing, automotive, etc., and the torch has been passed to the world of technology.

I’ve seen economic and investors debate if this shift means less volatility overall in this segment of the stock market. This is unclear, in my opinion, given I believe this is uncharted territory, and making comparables to past downturns will be quite difficult. But, if we just look at the minimal dip that happened overall in tech stocks, which came at a time when the worst news about the virus was happening, the dip was not as dramatic, and the recovery of most those tech stocks took less than 60 days.

I’ve heard theories of a second dip, as many bought the last dip in the market and kept waiting for a second. But, as of now, most of the worst-case GDP, job loss, and economic deficit scenarios are priced into most stocks, and they are still holding ground is telling. It could suggest only a minor dip vs. a dramatic one, if any, coming before the end of June.

For many, what is going on in the market seems to confound. The market is reacting in untraditional ways. But I say again, these are untraditional times. The role of technology as a backbone is new within the last ten years. This is not something that will change anytime soon as the pace quickens for every company to, in some way, become a technology company.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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