By Tim Courtney, Chief Investment Officer
There has been a lot of speculation about the possibility of an impending recession, with the thinking regarding future Federal Reserve policy and interest rate hikes changing every month. The market went from starting the year certain that it was headed into a recession, to thinking that it might avoid one by February due to some positive economic news. However, bank failures in March have brought us back to where we started: a 2023 recession is now more likely. The volatility has left companies scrambling to find a strategy for success in such an unpredictable environment.
Despite this uncertainty, the market is looking to technology companies as a possible way through a recession. With people still needing technology and communication services in tough economic times, tech names have been seen as defensive options. Still, even though those tech companies are largely profitable, they are not immune to cuts. Layoffs hit tech hard starting late last year, with some of the biggest names like Google, Amazon, Microsoft and Yahoo cutting jobs. And, so far this year they have laid off 168,243 this year– more than all of 2022.1
The layoffs are a strategic step to prepare for an impending economic downturn and also reflect a rebalancing of the sector, which we discussed in a commentary earlier this year. The rebalance is somewhat expected after a period of rapid growth and spending during the pandemic. With interest rates at zero, companies were able to secure cheap financing and hired aggressively, many over-hiring and overpaying. Now that rates are higher and investors are looking at what companies are doing with their resources, this over-allocation of capital is beginning to correct, especially with unprofitable companies or divisions. For example, Alphabet’s self-driving car unit has cut 8% of its staff this year2 and Disney eliminated its Metaverse division entirely.3
While layoffs appear negative on paper, there is an upside. It is healthy for both capital flow and human capital allocation to rebalance as we’ve lived several years with the market focused on a few sectors at the expense of others. Companies can restructure themselves towards profitability rather than growth at all costs, resulting in the freeing up of resources that can be redirected into areas starved for investment or talent.
This rebalancing may not have happened if inflation hadn’t forced our policy makers to reverse their 0% interest rate course. Like a nerve that sends pain signals to the brain alerting someone to take action, the market has sent a painful inflation signal to economic decision makers to take action and rebalance. If you have questions about tech sector allocations or the outlook for the impending recession, contact your Exencial advisor.
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