By Tim Courtney, Chief Investment Officer
Over most of the last decade technology and tech related companies were hard to beat. Several companies reached $1T valuations. Tech ETFs from 2011-2021 had massive performances ranging from 300%-500% gains in that time.1 Even during the pandemic and shutdowns of 2020, this phenomenon flourished with the perception that many of these companies are either immune to economic slowdowns or beneficiaries of them.
However, 2022 has created different headlines. Anticipation of a future recession has landed several tech or tech related companies in the middle of investor concerns. Layoffs, hiring freezes and missed earnings have plagued several big names in recent weeks.2 Interest rates and soaring inflation have also been problems for many fast growing companies that had gotten used to low cost capital and debt.
Technology’s greatest impact comes from providing new solutions to problems or making current solutions more efficient. This is something – productivity growth – critical for a growing economy. And while we’ve seen multiple companies help deliver better productivity, we are also watching others struggle. Cryptocurrency based on blockchain technology has been the recipient of massive amounts of capital – both liquid and human. Its contribution to the productive economy, however, has been small if anything, and multiple firms are filing for bankruptcy.3 This could well be blamed on first-generational issues that could be fixed with next generation advancements; but so far digital currencies have provided little in terms of economic productivity.
So-called Covid or stay-at-home stocks (e.g., Zoom, Netflix, Peloton) have also lost footing.4 Many of these names are facing hurdles simply because of a change in consumer preferences. Since emerging from the lockdowns of 2020, people have been increasing travel and experience-based purchases.5 These names have added economic value, but consumer tastes change and there is pressure on stay-at-home stocks now.
The technologies our economy is starved for currently are those that increase and encourage productivity growth. Throughout history, technology such as the cotton gin, automobiles and computers have delivered incredible productivity growth for the workforce. And, right now, workforce participation is dwindling, with around 2 million missing from the labor market.6
The tech sector has a unique opportunity to add value to the economy in a great way – and to help battle inflation. Companies involved in software, cloud computing, robotics and automation could be considered contenders to develop solutions to labor shortages. While the winner remains unclear, we’ll likely see several companies introduce promising technology across multiple industries.
There has been a lot of fascinating technology that has captivated the imagination of the public and high-caliber investors in recent years. Unfortunately, many of the headline technologies have done little to boost productivity and help lessen inflation. There will almost certainly be companies that deliver the productivity our economy so sorely needs, and we will want to own them. If you have any questions, please feel free to contact your Exencial advisor.
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