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Sargon's Corner - Tech Goes Crazy!

The pandemic continues to upend views on what constitutes accepted wisdom when it comes to investing. As CNN Business remarked this week, suddenly tech stocks are beginning to look like a safety play, while formerly resilient consumer stocks like Coca-Cola have been struggling as retail activity slumps.

The tech-weighted Nasdaq has hit a record this week and is up 19 percent for the year, while the S&P 500 is three percent below its peak and the Dow is nine percent below its record. It would seem, despite indications in some parts of the US of recovery, that Covid-19 is changing how investors think about the longer term.

As CNN quoted JJ Kinahan, chief strategist at TD Ameritrade: “I want to go somewhere where a stock can still do well during a shutdown, and that's technology.”

The big tech stocks have been performing well, largely on the basis that they have been enjoying increasing demand for services, are fast to transition, and are likely to continue to improve when the recovery eventually comes.

But the US stock market rebound from the slashing selloff in March may soon be hit by what some commentators are predicting could be the release of reporting on one of the worst ever earnings seasons. Bear in mind it has included the full pandemic lockdown and only staggered re-opening of the economy.

And more cost-cutting is likely to be ahead. The unemployment rate has come down from its peak in April, reports CNN, but is still higher than it was at any point during the Global Financial Crisis.

As well-known CNCBC commentator Jim Cramer said this week's recent moves in the Nasdaq were truly insane. “It’s time to admit that these moves are crazy.” However, Cramer also emphasised that, while the surges by major tech stocks were unlike anything he had ever seen, this wasn’t a repeat of the late 1990s tech bubble.

“Insanity just means can we please just stop comparing it to 1999, because in 1999 a lot of really bad companies gained a lot of market cap,” said Cramer. “Here, a lot of unbelievably great companies are gaining market cap at a pace that you’ve got to give them a speeding ticket.” Companies like Amazon, Tesla, Nvidia and Microsoft were trading like small caps, despite their trillion-dollar market caps.

To quote the late Prince from his 1984 movie Purple Rain movie: “Are we gonna let de-elevator, bring us down, oh, no no let's go, let's go crazy, let's get nuts.” It perhaps shouldn’t be forgotten that Prince was calling on his listeners to rise above temptation. (‘De-elevator’, represented the Devil in the song).

Meanwhile, an article in the Financial Times this week suggested the recent rise in coronavirus cases in the most populous US states was halting consumer and business activity, and that the economic rebound may be over.
“Having overcome the initial coronavirus shock in March and April more rapidly than expected, aided by massive doses of fiscal and monetary stimulus, the rebound from the sudden recession is now being threatened by a surge in Covid-19 cases across many parts of the Sunbelt, including populous states like Florida, Texas, and California,” says the Financial Times.

“The loss of economic momentum is already appearing in high-frequency data related to employment, restaurant bookings, and mobility, all of which are flattening out. The impact is especially pronounced in the hardest-hit states, as consumers again become more cautious and authorities pause or even roll back the process of lifting restrictions on economic activity.”

Perhaps it’s time to re-examine some of the investment staples of previous times, as some of the consumer giants reposition. CNN reported this week that Coca-Cola is in the process of taking down its “Zombie brands.”

Having recently announced the shutdown of juice smoothie brand Odwalla, it is considering dumping others that aren’t growing, CEO James Quincey said this week.

Like other major food businesses, Coca-Cola has been streamlining its product offerings to meet the changing retailing environment and is focusing on its larger and best-selling brands to help ease the strain on supply chains. And remember, this is the company that took the brutal, but quick decision to kill off its reformulated “New Coke” in July 1985 - barely three months after its launch.

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Sargon Elias is a multi-decade veteran of financial markets with experience spanning across the globe. He is currently CEO of Rockfort Markets.

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