Why Economic Optimism Is Bad News for Tech Stocks

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The tech selloff has gotten ugly. The stocks that led last year’s rally are getting hammered, pressured by rising interest rates. Since hitting an all-time high on Feb. 12, the

Nasdaq Composite

is down 8.3{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} in just three weeks. The tech-heavy index was briefly in correction territory on Friday morning, meaning a decline of at least 10{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} from its peak, before a modest rebound. It’s worth noting that the Nasdaq is still up 48{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} over the past 12 months. But right now, tech stocks are getting crushed. Expect lower lows.

The problem when it comes to technology shares is that good news is bad news. President Joe Biden now says that any American adult who wants a Covid-19 vaccine should be able to get it by the end of May. Infection and hospitalization rates are falling. Congress is getting ready to pass a new, $1.9 trillion stimulus package. Meanwhile, the latest flurry of tech earnings this past week offered hints that corporate information-technology spending could pick up in the second half of the year, possibly dramatically. There’s also the potential for a giant infrastructure package from Congress. The market is prepping for boom times, and that means tech companies no longer have the exclusive on growth investing.

Dan Niles, founder and portfolio manager of the Satori Fund, a tech-focused hedge fund, points out that prices are soaring for every kind of asset—houses, used cars, baseball cards, SPACs, Bitcoin, lumber, copper, oil—almost everything other than commercial office space. In short, the market sees inflation—and that has interest rates rising. The 10-year Treasury spiked to 1.55{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} this past week from 1.2{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} a few weeks ago and less than 1{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} at year-end 2020.

Higher rates are big trouble for the kind of fast-growing, high-multiple stocks that led last year’s broad rally.

ARK Innovation

(ticker: ARKK), a buzzy $24 billion exchange-traded fund with a portfolio chock-full of profitless highfliers, has slid 25{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} since Feb. 12. Over the same span,

Renaissance IPO

(IPO), which owns shares of recent new listings, is off 22{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42}, while

Global X Cloud Computing

(CLOU) is down 15{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42}.

The roster of wounded stocks is long and filled with familiar names.

Shopify

(SHOP), a provider of cloud-based tools for online shopping sites, is off 23{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} in less than a month.

Zoom Video Communications

(ZM) fell 23{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} in just four days this past week, despite a strong earnings report on Monday. Shares of

Peloton Interactive

(PTON) fell 15{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} in three days, hitting its lowest level since November. Pet-food peddler

Chewy

(CHWY) is off 28{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} from its February peak.

Roku

(ROKU), the streaming-video company and one of ARK’s largest holdings, is down 25{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} in the past three weeks. The stay-at-home trade has gone cold.

Niles says he’s having the best start to a year in the 17-year life of his fund, in part by shorting the techs that drove the market higher in 2020. As a rough cut on valuation, Niles looks at the ratio of the capitalization of the entire U.S. stock market to gross domestic product—he says the measure now stands at 1.8, “the highest ever.” Thanks in part to all of the stimulus coming from Washington, Niles thinks that we could see the best GDP growth since 1984. That’s good for some stocks, but terrible for high-priced tech.

Marko Papic, chief strategist at Clocktower Group, a Los Angeles–based investment research firm, also sees a market awash in capital. “The fiscal taps remain open to an extent we have never seen before in human history,” he tells Barron’s. He remains generally bullish, saying that it would be “imprudent to be a bear” in the current environment. But he thinks the rotation out of tech will continue.

That doesn’t mean there’s anything inherently wrong with technology businesses. Papic says the issue is valuation, plus competition from an increasingly diverse set of attractive alternatives. “Tech stocks are already priced for what they are—amazing companies,” he says. “But it is difficult to see institutional investors plowing back into large-cap tech when there are so many other opportunities.”

Paul Wick, the longtime tech fund manager at Columbia Seligman, told me late last year that rising rates could crimp highflying tech shares, a warning that I included in my December outlook column. Wick, though, has found ways to make a tech portfolio work in recent months. The Columbia Seligman Communications and Information fund (SLMCX) is up about 5{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42} year to date, and Wick says that even with his value orientation, he’s finding plenty of stocks to buy.

“I’m not running with a lot of cash,” he says. “We’ve just had a very positive earnings season.” Wick remains bullish on

HP Inc.

(HPQ), which he recommended in this column last May; the stock has since rallied 95{1936381d4253f19a98bc2ecae94a0b0438ab0e234f1c555690d854373a3c9a42}.

He’s also still positive on

Applied Materials

(AMAT) and

Lam Research

(LRCX). The semiconductor-equipment companies are a play, in part, on the chip shortages throughout the industry. Manufacturers are going to need more capacity and more equipment from Applied Materials and Lam. Applied recently projected that chip-equipment capital spending this year would top $70 billion, up from $60 billion last year—with further gains in 2022.

“There are a lot of companies in tech land that sound really good,” Wick says. “You just need to be careful of the valuations you pay.”

Write to Eric J. Savitz at [email protected]