Professional investors are suddenly seeking liquidity. The process is causing tumult across investment categories and sectors … but the end is near.
It’s not easy to see what’s happening.
To the naked eye, it looks like professional selling of technology stocks, yet that’s not quite right.
Microsoft Corp. (Nasdaq: MSFT), Facebook Inc. (Nasdaq: FB), Alphabet, Inc. (Nasdaq: GOOGL) and many other big-tech stocks are near record highs. This isn’t about valuations or the sector. It’s about risk. We’re in the middle of a risk-off trade.
Thankfully, the process is nearing its logical conclusion.
Professional investors take risks off of their portfolios when they become concerned about slower economic growth. The idea is to quietly exit the fastest growth stocks before there is a stampede to sell. The proceeds are then normally parked in Treasury bonds or the safest businesses like The Coca-Cola Co. (NYSE: KO), The Procter and Gamble Co. (NYSE: PG) and Altria Group, Inc. (NYSE: MO).
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In addition to being well managed, these firms are noncyclical. They have predictable sales, profits and dividends which are all good attributes when the economy sputters. And because the shares of these businesses are widely owned, getting in and out of large blocks of stock is relatively easy.
Unfortunately, this is probably the wrong bet at the wrong time.
The economy shows no signs of slowing. Manufacturing is at its highest levels since 2018, according to a report in early March from CNBC. An Atlanta Federal Reserve tracker shows that gross domestic product (GDP) could reach 10% in the first quarter.
Pros are wagering, I suppose, that the economy is entering a period akin to 2001. This followed the bursting of the dot-com bubble and led to frantic selling of tech stocks. There were no bids for big blocks. Shares were decimated, literally. I understand the premise of why some are worried, but this idea is a misinterpretation of the current digital transformation.
It also ignores what happened to tech stocks in the later part of 2001. It was the bottom.
There has been some rotation into cyclical stocks. Many investors are adding technology-centric positions in energy, steel, auto and auto parts.
Remember, there is no rule against both growth stocks and cyclical issues rallying in periods of strong economic growth. This is especially true for the large-tech platform companies that get the lion’s share of their revenues from Fortune 500 enterprises that will soon be flush with cash.
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The bottom line is we have seen this movie before. We know how it ends.
Savvy investors should be using this period of weakness to buy the big-technology platforms.
This is not the end of the digital transformation story — it is the beginning of the second act.
Professionals will most likely rotate back into technology shares beginning in the second quarter as new money flows into their funds. Savvy investors should strongly consider getting ahead of this trend.
Best wishes,
Jon D. Markman
