What next after tech stock sell-off?

The sharp sell off in technology stocks highlights key issues for active share investors. Picture: AFP

In recent trading sessions we have seen increased volatility, largely due to a full 10 per cent correction in Nasdaq, the US technology index.

Is the current round of market jitters a sign that investors should allow for a lasting slump in share prices, or should we seize the opportunity to buy quality shares while they’re cheap?

Investors need to allow that two of the powerful influences on share price moves – expected profits and interest rates – are pulling in opposite directions.

My guess is the next year or two will have recurring times when market sentiment on the global economy turns negative and when shares will be sold down because of concerns of weak profits; nonetheless, the global recession will likely be milder and end sooner than investors generally are anticipating.

The outlook is formed in part because budgets will remain stimulative and monetary policy will be accommodative.

In aggregate, households are cashed up. In Australia, household saving jumped to 20 per cent of income in the June quarter.

Global growth won’t be great in 2021, but even without the early discovery of a vaccine, worldwide GDP seems likely to expand by about 2 per cent next year. History suggests sharemarkets recover during, and not after, recessions.

Meanwhile, low interest rates encourage investors to hunt for yield and that will include buying shares, while professional investors reduce the discount rates used in valuing future cash flows.

Cash rates are low, central banks are avid purchasers of bonds, some are targeting bond yields, and most are providing their commercial banks with cheap funding. The US central bank has changed its inflation target.

When inflation undershoots its target of 2 per cent, the Fed will tolerate higher inflation for a time, adding to the boost monetary policy is offering the US and other economies. Investors should start allowing for the return of mild inflation over the next couple of years.

The US tech stocks stumble arrived after strong gains, especially for Tesla, which doesn’t earn a profit, but had enjoyed a year-to-date gain of 500 per cent, including the jump in price when its share split was announced.

Apple shares also jumped when it announced a share split. Some big US tech stocks have compounding growth in their cash flows. That’s comforting to investors – especially when interest rates are extremely low and when share prices have dipped because of negative sentiment.

Don Stammer is an adviser to Stanford Brown Financial Advisers. The views expressed are his alone.

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