Stocks fell sharply yesterday amid profit taking. For most of the past year, daily comments on the stock market have discussed in some fashion the leadership of the Magnificent 7. While Nvidia# continued to climb yesterday in a very rocky session, and Meta Platforms# stock is still up by a third so far this year, after sharp gains in 2023, the rest haven’t looked so magnificent. Combined, the remaining five are underperforming markets year-to-date. While some point with solace to breadth widening, no clear alternative leadership has surfaced. Rather, speculation has risen in recent weeks. While those participating in the surge of bitcoin and some little tech names no one heard of until last week are all smiles, most of the rest sit there with looks that combine amazement and alarm.
Nothing dramatizes my point more than the recent action in bitcoin. The approval by the SEC of ETFs that could invest in bitcoin fed a surge that had already begun. Black Rock noted that its bitcoin ETF reached $10 billion in accumulated assets faster than any ETF in its history. While that explains, in large part, the recent surge in the price of bitcoin, it doesn’t explain why bitcoin is more valuable today than it was two months ago. Despite its name, you still can’t buy much of anything with bitcoin nor can one label it a store of value in an inflationary environment. Not on a day when the value swung by more than 8% in both directions within one trading session. Besides, if you haven’t looked lately, inflation is falling. When inflation was surging in 2022, along with rising interest rates, bitcoin prices were in retreat. So, unless shown otherwise, bitcoin has to be looked at as an instrument of speculation. And the same goes for other cryptocurrencies, although I recognize that Ethereum is holding up better than most in anticipation of new ETFs to come based on its value. Again, that will support a temporary surge (which may have already taken place) and not be related to any change in long-term value.
But bitcoin isn’t the only warning sign that speculation is getting a bit frothy. Super Micro Computer is a company few heard of until the start of this year. As its name implies, it produces an assortment of hardware to execute AI initiatives. Like Nvidia, demand for its products have surged and the stock has tripled in value in just a couple of months. Last week it was announced that it would be added to the S&P 500, a notice that alone tacked on another 20% to its value. Being included in the S&P 500 is noteworthy, but it doesn’t make an enterprise 20% more valuable overnight. Even the SPAC trying to finalize the acquisition of Truth Social, the social media site Trump uses to broadcast his tweets and rants, has started to surge again. Long term, the only one likely to benefit from this round of speculation is Trump himself who, along with lending his name, gets a piece of the action.
I can’t tell you when speculation will peak or end. Emotion, in the short run, always trumps reality. But look at the SPAC graveyard, filled with sub-$1 stocks. Remember the meme stocks? Where are GameStop, AMC, and Bed, Bath & Beyond today? How about those great IPOs everyone talked about like Peloton or Beyond Meat? Predictably they are well below their IPO prices today.
Bulls will point to the fact that speculative favorites only sell at 30-50 times earnings, whereas in late 1999 they sold for 100x or more. Translated into English, what that says is that speculative favorites are overpriced today, but in the past, they were even more overpriced.
The good news, at least for the moment, is that the economy is doing just fine. Growth is slowing a bit, and we see that in the moderation of bond yields. But there are few signs of pending recession. Friday’s employment report should remind us that our economy is still advancing. In that sense, the stock market today reminds me more of the first half of 1987 when stocks rose too far too fast without any noticeable economic headwinds or tailwinds. Then, in August, sobriety started to return, culminating in a one-day 22% drop in October, a decline that was reversed over the ensuing 12 months for most stocks.
All this mumbo jumbo of mine this morning is an alarm bell that it is time to forget FOMO, the fear of missing out, and say to yourself, “I missed the October bottom. So, now I will wait for a better entry point.” For investors, patience is a better p word than panic.
Nothing goes straight up. Nvidia’s sales won’t triple every three months. Shortages have a way of disappearing fast, especially when profit opportunities are greatest. Nvidia is bound to attract competition over time and that will impact profit margins. It still remains one of the great growth stories of a generation and it isn’t done growing. But nothing goes straight up. If one doesn’t own Nvidia, there will likely be better buying opportunities once the panic buying stops. As for the rest of the Magnificent 7, while Meta Platforms# and Amazon# are enjoying a bit of resurgent demand and rising margins, Microsoft# seems to have settled into a growth rate consistent with expectations. Its shares so far this year are performing roughly in line with the market. The same can’t be said for Apple#, Alphabet# and Tesla. For Apple, reality is that demand for smartphones has matured. Everyone has one by now. Demand for services is still growing, but China is a big problem that won’t disappear real soon. As for AI, Apple is likely to be a future beneficiary but not a direct participant. Alphabet wants to be a direct participant but early efforts have hit some snags. It rushed some products to market prematurely. We have witnessed this before, not just with Alphabet but with others, notably Microsoft. Alphabet has the money and size to keep at it until it gets it right. If management changes prove necessary, they will happen. Don’t count the company out. But don’t expect solutions tomorrow either. As for Tesla, while the U.S. may not allow Chinese cars to enter our market, the rest of the world will. Tesla has made a bet that software improvements can overcome the lack of new physical models. Right now, demand for electric cars in the U.S. is waning, waiting for the day when consumers see that the economic proposition of owning an electric car is superior to owning a traditional automobile. I don’t know if that is 2024 or 2030. Probably somewhere in between. Until then, the company could struggle.
The point here is that corporations stay “magnificent” for only so long. Investors need to recognize that. There will always be new magnificent investments. And they all don’t have to be tech-based. Good investors constantly upgrade. Speculative fever gives one an opportunity to trim dead wood at inflated prices. Panic presents buying opportunities. Use both wisely.
Today, Shaquille O’Neal is 52. Alan Greenspan turns 98.
James M. Meyer, CFA 610-260-2220