A Sideways Market, A Huge Opportunity for Tech Investors
Despite the Fed’s best efforts to stifle the economy—which it bizarrely believes is the way to conquer inflation—we are not going to have a recession. That’s the conclusion of our Eagle colleague and favorite living economist, Mark Skousen, editor of Forecasts and Strategies. Mark will go down in history for founding FreedomFest (We will be there!), and among other heroics, for his invention of a new macroeconomic indicator vastly superior to GDP and recently adopted by the U.S. Bureau of Economic Analysis. Called Gross Output, or GO, it is a superior predictor of economic fortune because it includes business-to-business transactions, not merely final consumption.
Business spending bests consumer spending as forward indicator of economic growth for at least two reasons. First, businesses have greater insight into their own particular innovations, economic environment, near-term revenue growth, costs, etc. Businesses focus on qualitative measures oriented toward the future rather than on only quantitative measures related to existing goods and services. Collectively that makes the recent spending of the nation’s businesses a prescient indicator of the near future of the economy. And when business spending is an investment in productivity—better machines, smarter workers—it is not only a herald, but a driver of economic progress.
Mark notes that the most recent government GO measure released in December for Q3 2024, was up 3.1%, a big improvement from previous quarters. Mark’s own Adjusted GO measure, which had been dragging along at 1.2% the previous three quarters, was also up nicely at 3.0%
That rise in business spending “signals that fears of recession from earlier in the year are dissipating quickly.” Noting that these figures are from before the election, Mark points out that the evident pro-business attitudes of the Trump folk should encourage “a brisk increase in business investment spending” even starting in the last quarter of 2024, which would show up in March data.
A strong or strengthening economy, however, does not mean the bull market will continue. Share prices are driven by two forces: earnings, and the market’s emotional response to earnings, as expressed for instance in “multiples” such as price-earnings (P/E) ratios. Earnings in tech have been robust, and we expect that to continue. But, on average, we don’t expect PEs or other multiples to expand. As we write the PE of the NASDAQ 100 is circa 37, well above its historic range of circa 22-32.
The bull may need a breather. The good news is that this does not necessarily mean a bear. Bear markets are rare. Some argue there has been only one true bear market since the early 20th century, starting in 1929 and running for 12 years, for nine of which the S&P fell into negative territory. In the 82 years since, the index has been negative for only 22 years, and only in 14 years did it fall by more than 10%.
More to the point, the market has been down for two or more years sequentially only twice during that period: from 1973 through 1974 and then again from 2000 through 2002. The worst setbacks have ended as quick round trips.
Practically speaking, as the estimable Vitaliy Katsenelson has pointed out, since 1942 we have had only two kinds of markets: bull markets, up significantly more than the historic average of circa 10% over roughly five to 15 years, and “sideways” markets up or down by single digits over a similar period.
That’s likely where we are headed. And that’s great news! Because…
A sideways market is an OPPORTUNITY NOT TO BE MISSED!
A sideways market is a stock-pickers’ market, and this time round it will be the tech investors who have the best picks.
It’s a stock-pickers’ market because, absent a powerful trend, we get lots of mini-trends and “single stock volatility,” with prices moving up or down for idiosyncratic reasons. In that kind of environment, there is an extra payoff for recognizing value.
By value in tech stocks, we don’t mean “cheapness.” We mean that a listless Mr. Market treats a company with a decisive technology, business model, or leadership edge with indifference, i.e., he leaves them to us.
To build wealth it is imperative to recognize these companies and these moments. Fail to do that and you will end up with the average and very mediocre returns of the sideways market. You don’t want that. You want to maintain your portfolio’s momentum.
This time round, stock picking will favor the tech investor. That’s because artificial intelligence (AI), hyperscale, accelerated computing, or what you will, is multiplying tech opportunities at a rate we have not seen in a while. AI both demands and supports innovation.
AI demands innovation in infrastructure because it requires so much power and makes so much heat. To take just a few examples, in our Gilder Technology Report we have begun to cover innovative nuclear power companies because AI’s power demands are prompting a renaissance of exotic nuclear projects. Oil and gas, though, may be better bets and are probably better for the environment and for innovation as well. Also ascendant are data center cooling specialists well on their way to transforming our data infernos into power sources. Do the top semiconductor firms look pricey? Just wait until we leave chips behind for wafer scale computing now being pioneered at Cerebras and, yes, Tesla.
AI is supporting innovation through the Great Convergence. Disparate technologies developed mostly in isolation from each other, from micro-machines, to gene slicing, to neo-materials, to Super Sensors, to even 3D printing are being welded together in astounding fashion: to regenerate human organs; to make the blind to see and the lame to walk; to smart cities that repair their own streets, manage their own traffic, feed their own people, and eliminate their waste; to the spatial web wherein every physical structure has a digital twin that allows us to foresee problems and opportunities alike, with dramatic improvements in productivity, efficiency, and safety.
And in every case, the welding together is done by an AI that draws on data from every linked machine, interprets it, and moves the next machine to action.
We are not worried that these companies’ “multiples” are already too high. Some of the best have no multiples at all yet, still being private. Others, including some already well-known and robustly priced, have a decade or so of fantastic growth before them via products and services still barely glimpsed at by most investors.
Mr. Market may shuffle sideways for a few years. The perspicacious tech investor is about to blast off.