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2022 was a tough year for tech stocks. The Nasdaq 100 Index — a widely followed benchmark for the sector — fell 33%.
For comparison, the S&P 500 only fell 20%, while the Dow Jones Industrial Average was only off 9%.
Many have likened last year’s tech wreck to the bursting of the dot-com bubble.
I believe those comparisons are naive.
Compared to the dot-com collapse, 2022 was a walk in the park. The real carnage will play out this year.
Why?
Of the 768 stocks in the entire tech sector, 57% lost money in 2022. At the same time, venture capital (VC) funding is drying up. In other words, the one thing propping up these money-losing companies is about to fall.
Avoiding a recession, Fed rate cuts or ending the war in Ukraine won’t fix this problem. We’re looking at a Silicon Shakeout that could take tech stocks far lower than most are prepared for.
Today I’ll share why I believe this, and what you can start doing today to turn tech volatility into quick short-term gains…
Tech Wrecks, a History
If we’re going to understand just how much trouble tech is in this year, we must first understand previous tech drawdowns.
Last year marked just the 7th down year since the Nasdaq 100 started in 1986. Previous years were 1990, 2000, 2001, 2002, 2008 and 2018.
(Click here to view larger image.)
There are two types of tech drawdowns:
Those that precede a major recovery — all but the dot-com crash.
Those that are a preamble to further losses — the dot-com crash.
If 2022 proves to be like 1990, 2008 or 2018, we should see a big recovery this year. But the factors behind last year’s losses are more in line with 2000 than any other down year for the Nasdaq.
Take 1990. A spike in oil prices drove the decline back then. This impacted the non-tech indexes, like the S&P 500, almost as much as tech. The next year, a rapid victory in the first Gulf War set up a new bull market.
This is unlike 2022. Last year’s sell-off wasn’t driven solely by a spike in oil prices like the 1990 bear was. War in Ukraine contributed to the decline, but war was just one factor.
Stocks were also much more overvalued in 2022. Shiller’s CAPE ratio was about 123% greater than average as this bear started. It was about 10% below average in 1990.
Let’s look at 2008. Back then, a global financial crisis led to large losses across the board. Overleveraged financial firms all got blown up, but the Federal Reserve stepped in to fix the problem. This time around, money-losing firms won’t get the help from the Fed, because the Fed already did that back in 2020.
So, neither 1990 or 2008 is similar to 2022. However, there are some similarities with 2018.
In 2018, rising interest rates scared traders. When the Federal Reserve stopped raising rates in 2019, stocks soared. If the Fed cuts rates this year — as Ian King pointed out as a potential scenario earlier this week — a new bull market could begin.
However, we should also acknowledge that cutting rates doesn’t always help stocks. In 2000, the Fed cut rates aggressively as the bubble popped. That didn’t stop the multiyear bear market.
And here, in 2000, is where we see the most worrying similarities to 2022…
2022: Dot-Com 2.0
The bear market of 2000, like the one that began in 2022, was long overdue. A major reason why is venture capital.
In the late 1990s, startups had access to almost unlimited funding. All it took was a “dot-com” in their name and venture capital firms threw money at management.
Pets.com is one example. The company was selling pet food for less than big-box stores, and at less than their cost. After losing money on the sale, Pets.com shipped the heavy bags for free, losing money on delivery too.
This went on as long as VCs funded the losses. When VCs never got their growth and realized they wouldn’t for many more years, the funding stopped. Then, the company went bankrupt.
The business model for Pets.com and many other dot-com darlings was simple enough — lose money to get customers and then … somehow, someday … make money.
The problem was the “somehow, someday” parts of the business plan never came to fruition. There are countless examples from this era that follow the same playbook.
At the end of the day, a company can’t lose money in perpetuity. So, after the bubble burst and VC funding dried up, thousands of companies went bankrupt. Hundreds of stocks went to zero. Losses totaled trillions of dollars.
That was a generation ago … long enough that investors forgot the lessons from that era. So the potential for it happening all over again is high.
Uber Technologies (UBER) provides a 2022 example. The company offers rides on demand. Its costs exceed revenue for most rides. Venture capital is, in effect, subsidizing the rides consumers take.
For many years with interest rates at 0%, money was cheap and this model was sustainable. Now, with rates climbing towards 5%, it’s not.
Uber hasn’t made any money on a yearly basis for its entire existence. Analysts don’t expect a profit anytime soon. But investors have so far covered over $15 billion in losses for the company. If that funding stream stops, Uber could go bankrupt.
Chewy (CHWY) is an even better modern example. It replicated the Pets.com business model — sell expensive and heavy items at a loss. Investors have poured in $2 billion without seeing a profit. That will be harder to stomach now than it was when rates were at zero.
It’s not just Uber and Chewy. Remember, 57% of the 768 stocks in the tech sector lost money in the last year. This is a massive headwind for tech if economic conditions worsen this year, especially as they’ve already begun to tighten their belts.
This Year Brings a Silicon Shakeout
The table has been set for an upheaval of tech companies in order to streamline their business, and the biggest factor is remote work.
The 2020 pandemic normalized the idea of working from home full time. Many workers, especially those in tech, grew to like working at home so much that they would sooner quit their job than return to the office. Remote work became the rule, not the exception.
That is, unless you work for Elon Musk. The electric car titan turned Chief Twit is requiring workers to come into the office five days a week. He made this change while downsizing so much, it became clear he doesn’t need more than half the staff or the space his predecessors believed they did.
With a majority of tech stocks losing money, and a prominent tech figure showing others that more can be done with less, it’s time to prepare for a Silicon Shakeout.
With the sector pursuing remote opportunities and downsizing offices, high-cost Silicon Valley’s days may be numbered. Many of the companies that operate there are also facing ruin. There are questions about whether or not Silicon Valley will even survive.
This might scare anyone that’s exposed to tech stocks, but it shouldn’t. Because this shakeout is a far greater opportunity than it is a misfortune.
A backtest of my latest trading strategy shows it would’ve made gains of 161% on DASH as it fell over 20 days…
214% on SPCE as it tanked in less than one month…
And even 596% as META cratered in three weeks.
But I believe these gains are just the beginning of what’s possible.
In fact, I predict we’ll soon have the opportunity to gain 442%, 564% and even 824% before this summer as the Silicon Shakeout takes hold.
To see how, and learn what to do right now to prepare, click here.
Regards,
Michael CarrEditor, Precision Profits
P.S. My method for making money during this Silicon Shakeout has nothing to do with short selling.
It may be a different trading method than you’re used to … but it’s an important skill to learn for 2023 and beyond.
I call it “Shakeout Trades” — a high-octane, rapid-fire trading method that’s far less risky than short selling, and potentially much more profitable.
Click here to put your name down, and I’ll make sure you learn all about it next Thursday.
Market Edge: Lessons Learned From the 2000 Tech Bust
By Charles Sizemore, Chief Editor, The Banyan Edge
As Mike explained today, tech busts are nasty to live through. And Charles Mizrahi shared a similar view last week, recounting some of the tech busts of the past decades.
Unfortunately, I remember the last tech bust all too well.
I graduated from college in the spring of 2000 … just as the epic tech bubble of the 1990s was starting to implode.
Tech stocks started to crack in March 2000 … and by May, the Nasdaq had dropped about 40% from its all-time highs.
Great! Buy the dip, baby!
At first, that seemed like great advice. The Nasdaq actually rose about 40% over the next few months. The bear market was rough, but it was over … right?
Of course, you know it was far from over. By the time the Nasdaq finally bottomed out in late 2022, it was down 80%.
In hindsight, it was good that I started my career then. As a young guy fresh out of college, I had dreams of becoming an instant dot-com millionaire … but I had no clue what I was doing at that age and no capital to invest.
Had I started my career even five years earlier, I would have assumed making money in the stock market was a breeze (after all, all you had to do was buy glitzy tech, right?) and I would have learned horrendously bad investing habits that I’d have to unlearn.
If I had actually had a nest egg at the time, I likely would have blown it up. Losing half of a $10,000 portfolio is unpleasant. Losing half of a multimillion-dollar portfolio is devastating.
Getting started during the tech bust proved to be a godsend. It taught me important lessons about risk management early, and it helped to mold me into the conservative income-focused investor I am today.
Getting back to Mike’s point, we have no reason to believe the bear market in tech is ending any time soon. The bubble leading up to the bust inflated stock prices to levels that never made sense. It was ludicrous that Tesla was ever a $1.2 trillion company or that Carvana existed at all.
And while there may be a few bargains here or there, the market as a whole is far from cheap.
There will come a time to buy and hold innovative new technology stocks. But for now, there might still be money to be made betting the other way … and Mike’s got a plan for that.
His strategy is to watch these embattled stocks for signs of weakness, then capitalize as these stocks continue to trudge downward…
How does Mike make money as stocks fall? Go here, put your name down and he’ll tell you in an urgent investment briefing next week, January 12 at 4 p.m. ET.
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