Bears and bulls are dangerous. If one doesn’t run you over, the other will maul you. The latter happened to tech investors in January and February as Jim Cramer’s FANG (Facebook, Amazon, Netflix, Google [now Alphabet] fell like a boulder in the Rockies. Never mind whether you should buy, sell, or hold, what’s going on with tech stocks?
Another thing to look at is the NASDAQ NMS Composite Index. Tracking common tech stocks, the index includes companies like 1-800-FLOWERS, 6D Global Technologies Inc., Abaxis Inc., and Yahoo! Inc. All of those are down double digits from a year ago as of February 29. The index itself is down by more than 8 percentage points in the last year.
Despite this downward trend, the index was up 1.95 percent in the previous five days on March 1. All four FANG stocks were up in the same period. Does that spell rebound? Maybe. But it’s important to note that all four FANGs, except Netflix, were down from the month before.
That’s hardly a rebound. The tech stocks are riding the volatility train around a mountain through a dark tunnel. We could see another downturn by the end of the month.
What’s Causing the Tech Market Volatility?
Tech stocks and market volatility is a fact of life. Sometimes, things go well and sometimes not. But what causes the turbulence? There are many theories, but is there any way to tell which views hold water?
Jim Cramer’s unique insights lend him to believe it’s this anger-fueled political season. On his blog, he wrote:
I am saying that the backdrop that politics creates just makes people feel too uncertain to invest.
On the other hand, a post published on the blog of the Federal Reserve in St. Louis blames it on existing technologies.
Adrian Peralta-Alva claims the U.S. economy downturn in the 1970s was due to legacy firms stuck on existing technologies, but the 1980s drew out the IT revolution. The stock market didn’t improve right away because older firms adopt new technologies gradually and new IT companies didn’t start going public until the 1990s. If he’s right, the stock market boom was driven by investor confidence in these new tech companies.
Alva doesn’t address what’s causing today’s volatility (his post was published in 2012), but if his theory is correct, it might be because the influx of new technology company IPOs is so rapid that investors can’t keep up. Crunchbase has more than 2,000 companies listed in its FinTech category. Most of them are less than a decade old.
Then, there’s the nature argument. Perhaps what’s causing the volatility on tech stocks is the wrong question. Maybe we should ask instead, “What’s a good investment strategy when tech markets act like young adults?”
