Wednesday, 27 May 2020

Wall Street is Undergoing an Alpha Apocalypse

We might be witnessing a Stock Bubble Correction
With Wall Street too tethered to FANG, the NASDAQ is not having a good time this week.

In one of the most volatile trading weeks in recent memory, an Amazon and Google miss saw a lot of negative movement into the red.

Tariffs, rising interest rates, Chinese dollar weakness and trade wars getting more serious means the market is getting hurt.

Just as cryptocurrencies are too tethered to Bitcoin and Ether, when Wall Street is too tethered to tech stocks, increased volatility is bound to happen. The dynamics of the NASDAQ are changing fast.

The global connectivity of markets means a weaker China and rising interest rates can really impact the record-high stocks we had previously in 2018 that are being corrected this week and likely next week as well.

For new investors, volatility like this hasn’t been seen. It’s our first bear cycle. A decline in stocks such as Amazon, Facebook and Netflix could see a re-writing of Wall Street for 2019. Even as the likes of Microsoft and Apple should hold steady, the two companies worth over $1 Trillion in market cap.

In 2019 it’s highly likely the stock market plunge (and volatility) becomes damaging or a drag to the U.S. economy, setting up a late 2019 or early 2020 global recession.

High-flying technology stocks such as FANG really over-heated the economy, in essence creating a Wall Street bubble. Even while guidance for Amazon was light for Q4 of 2018 and Google is showing vulnerability, it’s nothing compared to the hit Chinese tech stocks have taken in 2018. Trump’s trade war with China is likely the major macro trend that will cause the next global recession.

Snapchat and Twitter continue to lose DAUs and for Facebook’s flagship app it’s likely a lot worse. This is offset by Instagram taking over as the most popular app for American teens. However, it’s nothing like the growth we are seeing in China for DAUs and YOY growth. ByteDance, Momo and WeChat are spreading into more Asian markets, showing the shift to Asian technology apps and platforms that have a much longer-term upside.

With Apple, AT&T, Disney and others getting into streaming and massive debt, the prospects for the next decade are not good for the likes of Netflix, given this increasing competition. People forget how big IQiyi and Amazon Prime video are likely to become.

Amazon will be fine as it accelerates its impact into Advertising and health care, both of which I will write about in the coming weeks.

By Michael K. Spencer
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