“An entire generation of entrepreneurs & tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run,” said Bill Gates in a tweet on May 1. He added, “The unlearning process could be painful, surprising, & unsettling to many. I anticipate denial.”
The Microsoft founder is a pioneer in the IT industry. He is known for his visionary ideas and predictions, including that of a global pandemic. And this current prediction rings alarm bells for many investors and traders. Especially since another visionary tech billionaire Jeff Bezos retweeted Bill’s tweet, adding, “Markets teach. The lessons can be painful.”
When a little-known virus began to make headlines in early 2020, little could anyone guess that their lives would change forever. Most of the world’s retail went online. Streaming services dominated theatres, and everything was rapidly digitized, leading to an unprecedented boom in tech company valuations and growth.
Everything changed as the markets lost trillions in value in the recent weeks. At the end of the pandemic-fuelled bull run, investors abandoned once-hot startups, and now even companies considered too big to fail are also feeling the brunt.
Apple lost $200bn, and its position as the most valued company in the world has been wrestled away from it by oil producer ARAMCO. Most tech companies are declining, resulting in the Nasdaq composite falling over 13% in April- dropping more than 30% from a record high in 2021.
The worse hit was Meta, losing $230bn in market value last February after reports of the first-ever user decline in Facebook history.
Amazon also reported its first loss since 2015 last month. And Alphabet, though faring better than its peers, fell short on revenue as the YouTube and TikTok battle rages.
Big Tech isn’t hiring
Twitter and Meta announced in their internal memos that they won’t be hiring due to expense guidance tabled in their earnings reports. Amazon believes that its warehouses are ‘overstaffed,’ but layoffs are not in discussion yet. However, they have been “working to remedy that.”
Layoffs.fyi, a layoff tracking site reported that over double the tech firms in 2021 are laying off employees’ same time this year (from 25 to 55). The S&P 500, considered widely the benchmark for US stock market performance, declined 13.3 percent in April. It was the steepest four-month drop to start any year since 1939.
However, it’s not a general trend, as 431,000 jobs were added to the broader market in April. A senior analyst at Investing.com, Haris Anwar, said that the post-pandemic bullish sentiment is now being normalized. Pandemic superstar like Zoom, which was valued at more than 500% in one year, slumped down to pre-pandemic levels. Netflix, which added 36 million new users, lost more than half of its value by April 2022.
An analyst from digital transformation consultancy Publicis Sapient, Raj Shah, remarked that the revenues are down, costs are up, and tech companies will freeze hiring, reduce costs, and re-examine investments.
However, he was not too decisive on whether this hints at a tech bust.
The invisible hand
Experts believe that the current tech crisis isn’t just about over-evaluation. The Russian invasion of Ukraine has aggravated supply chain problems that resulted from the pandemic.
Meta’s CEO Mark Zuckerberg, reportedly said that the war in Ukraine is not just a humanitarian crisis but also an economic one.
Facebook was blocked in Russia, and the use of the network in Ukraine is limited because of the war. This has wiped out the revenue from Russian and Ukrainian ads on FB.
President of Business Intelligence at GroupM, Brian Wieser, said that there is a palpable fear of the economic crisis that was catalyzed by the war and the prevailing issues of supply chain disruptions and inflation. Weiser also added that many investors are acting as if depression is inevitable.
The Chinese zero-covid policy and strict lockdowns in important manufacturing centers like Shanghai are disrupting the global supply chain. Cheap Chinese goods (especially hardware) are hard to import, and most of their labor remains unproductive due to severe lockdown measures. It is an issue for big tech, which uses China as their manufacturing hub.
The Chinese economy is also suffering through a real-estate bubble burst marked by the collapse of industry giant Evergrande group. The pandemic lockdowns, trade wars with the US and Australia, Uighur humanitarian crisis, civil rights protests in Hong Kong, etc., have put China in a precarious situation.
Soaring gas prices due to sanctions and trade wars with Russia have increased fuel prices across the globe, exacerbating the current inflationary period. The US was at a 30-year high inflation rate of 8.3%. It is likely to have had an impact on e-commerce. Another major fear among investors is the Federal Reserve increasing interest rates higher to tackle inflation and pushing the economy into a recession.
Bad news from big banks
In early April, the Deutsche bank became the first big bank to forecast a ‘mild’ US recession. They now predict an even worrisome outcome for the Federal Reserve’s move to increase interest rates.
“We will get a major recession,” Deutsche Bank economists wrote on April 26, within a month of their first forecast, in their forboding report ominously titled, “Why the coming recession will be worse than expected.”
Deutsche Bank said that historically the Fed has not been able to control even minor inflation and unemployment without pushing the economy into a significant recession.
They created an index tracking the distance between inflation and unemployment for over six decades and the Fed’s goals for those metrics. They noted that the Fed is way behind the curve than in the early 1980s when inflation was extremely high.
However, the job markets performed spectacularly well, with Moody’s Analytics projecting that the unemployment rate will hit its lowest since the 1950s.
Deutsche Bank is the most bearish among big banks. Their peers like Goldman Sachs find the situation challenging but does not believe a recession is inevitable.
Chief investment officer of USB Global Wealth Management, Mark Haefele, said that inflation will ease and that the group does not expect a recession from the rising interest rates.
With polarizing positions taken up by industry giants, many investors and the market is in mild panic.
‘Crypto is dead’
Cryptocurrencies also nosedived this week. Bitcoin traded below $30,000 for the first time in a year. And more than $200bn was wiped off the broader market. Altcoins lost their value drastically, and the market was valued at around 1.38 trillion. Even Ether, Solano, and Cardano were down by double digits.
Some remarked on Twitter that crypto was dead. The recent pullout from the crypto markets has been partially attributed to the collapse of TerraUSD, a stable coin. Stable coins are supposed to be less volatile and are not expected to fail.
Even Macro-developments like inflation, the Federal reserve’s increase in interest rates, and the war in Ukraine affect crypto markets.
Nischal Shetty, co-founder, and CEO of Wazirx said that crypto markets are mirroring traditional markets and are seeing a correction. He went on to say that crypto was in a bearish phase.
A coin of interest, Luna was ranked 230 on the cryptocurrency index and fell from $88 to $.00003872, a 99.99 percent fall from its stable value.
Tammy Da costa, Analyst at Daily Fx, remarked that the failures of TerraUSD and the poor earnings report of Coinbase led to the collapse. He also noted that there is fear of big companies and institutions withdrawing their funds from crypto portfolios.
Tammy also added that the Federal Reserve interest rates are reducing people’s appetite for high-risk investments like Cryptocurrencies.
However, many cryptocurrency experts are still encouraging investors to buy the dip. Kumar Gaurav, founder, and CEO of Cashaa said that investors should take advantage of the dip as it is the perfect moment to invest. This is not the first time the crypto markets have suffered a massive loss.
Deceleration, not a decline
Weiser was quick to point out that the tech companies are not failing and are merely seeing the deceleration of their explosive growth. He also added that a growth of 30% falling to 10 or less might be upsetting, but it is not a crash.
Another important point to note is that expectations of tighter fed policy increased dormant bond yields. The yield on the 10-year US treasury note has almost doubled for the first time since 2018. Higher bond yields dull the lure of tech and other high-growth companies.
Investors are cautiously optimistic and look to the consumer price index and S&P 500, which can hold clues to the state of the market in the coming weeks.
Big tech has not expressed any desire to downsize or lay off employees yet.