On the first trading day of 2022, the Nasdaq closed at 15,832. On the same day, Apple became the first company to reach a $3trn valuation. What a difference a month has made, though. On 27 January, the Nasdaq closed at 13,352, a decline of 16%. Although the index has recovered some of its losses since, it is still down 10%, which puts it firmly in correction territory.
Meanwhile, the FTSE 100 has been largely oblivious to this dramatic fall and has risen slightly in that time frame. Does this bode well for the index?
The FTSE 100 – a bubble developing?
At over 7,500 points, the FTSE 100 is near its all-time high. However, many innovation-related stocks in the tech-heavy Nasdaq have more than halved over the last year. Therefore, is there an argument for saying that a bubble is actually developing in value stocks, which are the main constituents of the FTSE 100, rather than in tech stocks?
The FTSE 100 is packed with what I describe as old economy businesses. These are primarily banks, oil & gas, and miners. The stand-out sector from these three has to be oil & gas. Over the past year, Shell and BP have had their best performances in over 30 years. Many factors have contributed to this outstanding performance, but for me the key has been rising inflation. A very similar argument can be used to explain the surge in bank stocks lately, too.
Therefore, the continued share price gains of these old economy businesses could very well hang on how long high inflation persists.
In the face of supply chain problems, companies have ramped up their inventories significantly. But if they have overreacted to these problems and supply chain issues begin to unwind that could lead to slower growth. In such an environment, companies would be forced to slash prices to try to clear their bloated inventories. With slow or no growth and falling prices, then deflation rather than inflation, would be the real danger. In such a circumstance, many of the FTSE 100 heavyweights would likely crash.
Is the Nasdaq a bargain?
Clearly, many investors think that the Nasdaq’s recent market correction has thrown up some bargains; that is why it has clawed back some of its losses lately. However, I am not interested in short-term share price rises if my underlying thinking hasn’t changed.
The scenario I laid out above, which could lead to deflation rather than inflation, is not actually one I subscribe to. However, I like to consider all angles when building my macroeconomic case. I expect inflation to rise not only throughout 2022 but also next year too.
In this scenario, is the Nasdaq a bargain? I think not. I think fear, uncertainty, and doubt are gripping tech stocks at the moment and will do so for some time. As reporting season for the mega-cap and FAANG stocks are in full swing, any company that fails to meet analysts’ growth forecasts are getting crushed. Yesterday, it was PayPal. Today, it is the turn of Meta. The contagion that started in speculative stocks last year, is now spreading like wildfire. In such a setting, I am sitting on the side-lines.
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Andrew Mackie has no position in any of the shares mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Apple and PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
