Is Silicon Valley in a recession?
The question became more pointed this May 5 in the financial markets. After the Federal Reserve indicated on May 4 that it was entering a phase of aggressive monetary rate hikes to curb inflation, investors' eyes turned to most of the so-called growth assets, in other words tech.
The Fed lifted its Fed Funds rate by 50 basis points, to a range of 0.75% to 1%, its largest rate hike in more than two decades.
The central bank also confirmed plans to reduce its $8.9 trillion balance sheet, with $47.5 billion in sales starting on June 1 with a cap on its monthly asset sales at $95 billion, comprised of $60 billion in Treasury bonds and $35 billion in mortgage bonds.
"The Fed now finds itself in a peculiar situation where it’s forced to implement aggressive policy tightening at a time when economic indicators are beginning to soften," said Peter Essele, head of portfolio management, Commonwealth Financial Network. "The Fed has indicated its preference for a soft landing; however, if history is any indication, the Fed often misses the mark and things end with a thud."
Big Tech Down
Essele added that "the performance of recent equity markets would suggest that investors aren’t too convinced the Fed can engineer a parachute landing this time around with the economy."
For investors, the aggressiveness of the Fed suggests difficult times for the economy. Tech groups will be among the first companies affected if consumers and businesses reduce their purchases for fear of a difficult tomorrow. On the other hand, tech groups, which are often seen as growth sectors, tend to live on promises. In doing so, they need cheap money to finance their innovations.
Recession fears have therefore unsurprisingly affected the entire tech sector. The behemoths of the sector have been heavily impacted. Apple (AAPL) shares lost 5.57% at $156.77, while Microsoft(MSFT) shares declined 4,36% at $277.35 Thursday. Alphabet (GOOGL) share were down 4.76% at $2,334.93, Amazon (AMZN) shares dropped 7.56% at $2,328.14. Tesla (TSLA) shares slid 8.33% to $873.28, Meta Platforms (FB) shares tumbled 6.77% to end at $208.28 and Nvidia (NVDA) shares fell 7.33% at $188.44.
Investors seem to believe that Apple will, for example, sell fewer iPhones and Macs in the coming months; that companies will use less cloud services from Microsoft, Amazon and Google. They fear that advertisers and brands will reduce their marketing budgets, which will affect Google and Facebook. Investors also fear that sales of chips and other semiconductors sold by Nvidia will slow down. Car sales could also falter or the ambitions of Elon Musk's group to sell millions of electric vehicles in the short term could take a hit, investors also seem to think.
Reset Numbers?
The sentiment overall is pessimistic, with investors seeming to say they aren't ready to pay for the future products of these tech companies. In total, the Tech Big 7 saw its cumulative market capitalization melt by at least $400 billion on May 5.
"What we've been advising clients is just let the storm come through," Jefferies analyst Brent Thill told CNBC. "Most of our clients want to wait till companies cut guidance in tech. That's inevitable."
"The economy [is] slowing that they have to give up so we've had multiple correction and now we need effectively the fundamental correction. And the only way we're going to get clients back into these stocks is for the companies to acknowledge that the climate has changed, that they've taken their pipelines down and closed rates and that they've reset numbers. Until we do that there's a buyer striking tack, and they won't come back."
Investors have so far taken refuge in energy sector stocks which are benefiting from soaring crude prices following the Russian invasion of Ukraine. Banks, which are expected to benefit from higher interest rates, should also normally attract investors allergic to tech.
In a sign that things are not looking good for Silicon Valley right now, the tech-heavy index Nasdaq lost more than 9.1% in the first quarter, its worst quarter since the early days of the Covid-19 pandemic in 2020.
