Technical Correction, Not Capitulation
The doldrums continued this week as corporate earnings announcements commenced. As has been the case this year, certain sectors that had run up spectacularly over the past two years, continued to slide back to earth. Among those are some of the companies that benefited the most during the pandemic. Additionally, companies have begun reporting fourth quarter earnings, and are setting expectations for the coming year. For some, inflation is a headwind and declining margins and slower growth are a challenge. For others like Zoom, Peloton, and Netflix, the end of the pandemic ushers in different issues regarding attracting new customers or simply retaining customers they acquired during the pandemic. While the year has gotten off to a difficult start, I wouldn’t count it down and out yet. There’s still a lot that can and will happen this year.
As an aside, for those of you who see this as a tremendous opportunity to put new money to work, I’d caution against this mindset. Growth stocks have taken it on the chin this year, and more specifically the technology sector has been among the hardest hit. In general, the tech sector is down 10% YTD, with some companies in this sector down considerably more. Netflix was down 22% today. However, we are coming off back to back years that saw unprecedented appreciation in a small number of high-flying stocks which had an oversized impact on market returns. You are all familiar with these companies since they seemingly made headline news daily. I guess what I’m trying to say is that 10% is technically a correction, but not the capitulation we would like to see before making a more concerted return into some of these companies.
On the bright side, part of owning a diversified basket of companies means that at any given time some portion of them will be doing well. This year energy has been the star performer. I know filling up your gas tank is considerably more expensive these days, but that’s due to the price of crude oil having hit a seven-year high. As might be expected companies like Chevron and Exxon are doing very well. In fact, the energy sector as whole is up 12% this year. Consumer staples have also come back into favor as greed recedes in favor of fear. Companies like Procter & Gamble and Church & Dwight have held up well relative to the rest of the market. Some other areas that had underperformed this past year are coming back to life including the healthcare and financial sectors.
In company news, we learned Intel has picked a suburb outside Columbus Ohio to build a new $20B state-of-the-art semiconductor manufacturing facility. It is expected to need 3,000 full-time employees. Microsoft announced it is acquiring Activision for $69B in the hopes of building out a gaming future in the Metaverse. Berkshire Hathaway has proposed a $3.9B renewable energy project in Iowa, including wind and solar generation, that could rank as one of the biggest in the renewable energy industry. And Peloton has halted production of bikes and treadmills after a sharp drop in sales leaves the company with a growing inventory and fewer customers.
And lastly, the Federal Reserve has put forward a whitepaper discussing the pros and cons of a potential U.S. central bank digital currency. With the rise of cryptocurrencies like Bitcoin, it seemed inevitable that the U.S. government could develop its own cryptocurrency to either replace the dollar or be used in conjunction with the dollar. As fewer people carry “cash” and the move to credit and debit cards has become ubiquitous, it does make the case for a completely digital currency. However, a key consideration (and the one I am most concerned with), is how to preserve the privacy of citizens while maintaining the ability to fight illicit finance. I plan on reading the report this weekend and if you are interested you can find it here. I suspect it’s just a matter of time before we hand over our paper money for one last time. The digital age is upon us. Now you know.
Bruce J. Mason, MBA