Fed hike, China torpedo tech toward bear market
SAN FRANCISCO — Data points are accumulating that Janet Yellen’s Federal Reserve mistimed its shift in monetary policy.
Combined with a slowdown in China, December’s quarter-point rate-hike is helping torpedo tech shares.
And last week’s historic first-week plunge in stock prices was only one of a raft of leading indicators pointing to a global slowdown.
On Friday, a drawdown in business inventories caused economists to cut their U.S. fourth-quarter growth estimates.
The consensus among economists tracked by Moody’s Analytics fell by 200 basis points, to a quite-modest 1.2%.
Barclays slashed its forecast the most, by 400 basis points, to 0.7% from 1.1%, while Morgan Stanley also went bearish, cutting its fourth-quarter number 200 basis points, to an anemic 0.1% growth.
All this after the Fed raised its intra-bank lending rate for the first time in half a decade, to choke off what it saw as inflationary U.S. wage pressures.
Bond investors don’t seem to agree, at least enough to matter, as prices on medium-term U.S. Treasurys rallied to a two-month high on Friday, driving down yields.
In a rising-rate environment, those rates usually would be headed in the other direction.
Yet the Fed has been telegraphing a certain rate hike since the summer, which means investors may have erred in their assessment of when the Fed’s medicine would dampen growth.
The market move quite likely means bond traders think the Fed’s rate hike may need to be followed immediately by a “pause,” or a steady-rate environment.
The back-and-forth is not reassuring during a quarter when profits for the S&P 500 are expected to fall 7.3%, year-over-year, according to Zacks, with tech-sector profits falling 1.4%.
Yellen and her colleagues may soon be forced into the same about-face as their counterparts at the International Monetary Fund.
The IMF, during the last nine months, first raised then lowered its global economic growth forecast.
CHINA'S TECH INVESTMENTS
The source of the confusion here is China, where economists in Shanghai, like their counterparts in Washington and Brussels, have been zigging, then zagging.
Last Monday they implemented stock-market circuit-breakers, and the main index there fell 7%.
Later last week, they scrapped those controls, and the same index on Monday responded by falling another 5%.
Meanwhile, capital is leaving the country, as China’s foreign reserves fell by more than $500 billion in 2015, according to Bloomberg data.
The decline was the first annual drop since 1992 and could suggest an inflection point in the ability of regulators there to control currency rates.
JPMorgan Chase chief economist Anthony Chan said last week that he expects the yuan to weaken to a level between 6.75 and 6.8 against the U.S. dollar in 2016.
That’s compared to 6.21 yuan last January. If the prediction comes to pass, it will mean a yuan devaluation of 9% to 10%.
Considering how much the Chinese have invested overseas -- especially in shares of Silicon Valley companies -- that devaluation against the stronger dollar will put a significant bite on tech valuations.
'Second Great Internet Investment Bubble'
When economists look back some day, they may say that the Second Great Internet Investment Bubble may have run out of steam even without Yellen’s help.
The list of high-profile startups now valued for less than at their last private funding round includes Gilt Group, Foursquare and the newly-public Square.
Meanwhile, public investors have endured disastrous IPOs from Groupon, Zynga, Twitter and others.
Expect a lot more of that in the first half of this year.
Consider whether the U.S. economy, hurt by falling stock prices, a slowing economy and weakening currency in China — one of its most important trading partners — didn’t need throttling by the Fed in the fourth quarter.
U.S. stock and bond markets look to be indicating that.
Wrong or not, don't fight the Fed.
When uncertainty rises, as it is this month, the riskiest assets that depend on the fastest growth assumptions – as tech shares do -- suffer the most.
Now that forecasts have come down, my late-December proposition that tech stocks were 10-20% overvalued may prove conservative.
What happened last week suggests the Nasdaq is heading for more-damaging bear-market territory, which means cash may very well be the tech investors' best friend at the start of 2016.
