Popping Tech Bubble Fears

Have you heard? The Tech party is over—get out before those out-of-touch valuations fall to earth and that frothy IPO scene dries up! At least, that’s the impression you’ll likely get from headlines bemoaning the Technology sector’s recent slide. In our view, though, it seems a big stretch to interpret the sentiment-driven wobbles typical of bull markets as a bubble bursting. Yes, sector-specific volatility is as normal in a bull as broad market gyrations, and while Tech could very well wobble a while longer, the sector’s long-term prospects still look strong.

Many observers see Tech’s slide as confirmation their long-running “Tech Bubble 2.0” fears are right. Some point to companies with super high valuations getting punished, while others highlight weakness in some formerly high-flying recent IPOs. However, the sector hasn’t exactly been partying like it’s 1999. IPOs are more plentiful than in recent years, but investors aren’t bidding them up with reckless abandon—today’s first-day median returns are less than a third of what they were 15 years ago. Lofty valuations for a handful of companies might be a sign sentiment toward some firms is on the high side, but it’s difficult to argue the entire Tech sector is riding high on euphoria. Exhibit A: the near-consensus belief Tech’s recent slide is the beginning of a popping bubble. In 2000’s euphoric environment, most pundits deemed every pullback a buying opportunity. Even as Tech slid right down the slope of hope, many believed the “new economy” couldn’t stay down. Today, we see the opposite—a sign of lingering investor pessimism, not euphoria.

In our view, Tech’s pullback is just normal, sentiment-driven volatility—typical of healthy bull markets. Pullbacks help keep sentiment in check, lowering expectations and extending the proverbial wall of worry. And in our view, Tech has plenty of reasons to keep on climbing. The explosive adoption of mobile and cloud computing is driving demand for a whole host of gadgets, equipment, components and services. Continued Emerging Markets growth is opening up new markets and driving Tech demand growth globally. US firms are launching long-delayed IT systems and software upgrades—business investment in these areas hit all-time highs in Q4 2013.Larger tech companies also tend to have strong balance sheets with healthy cash balances, allowing them to continue to develop and grow.

You won’t see these positives in most media coverage, however—it doesn’t fit with the crash narrative at work. Nor, it seems, do accurate representations of the volatility. With words like “panic,” “brutal,” and “plunge” dominating headlines, if you didn’t read on, you might think Tech was down double digits—even though the Nasdaq fell only -4.6% over the three trading sessions in question (April 3, 4 and 7). Not pleasant by any stretch of the imagination, but not at all unusual—quick sequences of daily drops over -1% are common. To many, the drop probably feels worse, though—partly because of headline sensationalism, but partly because of plain old human nature. As Nobel-winning economist Daniel Kahneman theorized—our brains have evolved to feel the pain of loss over twice as much as we enjoy gains. Simply, the drop probably felt like a Tech correction.

The same applies to broader markets, which slid a bit, too. During the NASDAQ’s April 2-7 swoon, the MSCI World slipped -1.7%^[i] and the S&P fell -2.4%^[ii]—unpleasant, but normal. Here, too, headlines are making the drop out to be more than it (likely) really is. Some suggest, for instance, the lack of an apparent catalyst means we should brace for something bigger and badder. But markets don’t need catalysts to move up or down! Pullbacks and corrections (quick drops of -10% or greater over a few weeks or months) happen for any reason or even no reason. Sometimes investors latch onto a big, seemingly negative story, but not always.

Could the past few days be the beginning of a correction? Maybe. Markets seemed to stabilize on Tuesday and Wednesday, but that certainly doesn’t mean it’s all smooth sailing ahead. Short-term swings are impossible to predict with precision. But sentiment-driven volatility can flip quickly—after markets pulled back over -5% in late January, they were back above breakeven two weeks after they bottomed.

And for the long-term investor, focusing on this noise can distract from the bigger picture—your long-term goals. Riding the market’s daily ups and downs is the price we pay for long-term growth. It’s a tradeoff. Rather than zeroing in on Tech’s pullback and short-term swings, we suggest looking at the preponderance of evidence showing a favorable global economic environment—fundamental support for the bull to continue charging on.