Investors buy on the rumor and then sell on the news. It is an old but reliable adage for why company stock prices move before earnings and other announcements. The rumor and news phenomenon are the foundation for business media from newspapers, financial blogs and chat groups inside of trading platforms. This morning’s Sebastian Herrera and Akane Otani’s article The Tech Industry’s Epic Two-Year Run Sputters in the Wall Street Journal is a classic example.
The article points out that share prices of tech related stocks have taken a beating over the first part of the year. This is true and leading as the article states to wonder if “technology companies are set for a deep retrenchment or if growth is simply slowing from pandemic highs.” This is the stuff of rumor.
What about the news?
The article talks exclusively about B2C tech companies, Google, Amazon, Netflix, and the like. These stocks and companies are stressed in the rebound from the pandemic, particularly in making quarter over quarter performance comparisons. These and all tech related stocks did experience a significant run up during the pandemic. Some of that run up is running off in the face of higher interest rates, inflation, and the return to other forms of entertainment, shopping etc. Compared to the pandemic past and considering the inflationary future, these firms were bound to come off their pandemic highs.
Business to Business tech spending growing faster than business to consumer
The article does not talk about the B2B side of tech. According to Gartner’s IT spending forecast, growth in B2B spending on tech remains strong totaling $4.4 trillion in 2022, an increase of 4% from 2021. Within that forecast, $2.8 trillion of spending is B2B related and growing at a 5.7% rate. That is news.
Business spending and investment in technology gets underplayed in the face of simple stories about a few big FANG companies. It is understandable as the best rumors are the simple ones.
Watching for News before News
The savvy leaders don’t follow trends so much as they look to see where markets are going and what it will take to win there. That requires looking beyond the simple rumors to get at the signals shaping what will be the news. It is easy to rely on the rumors as short cuts given the turbulence in the world today from geopolitics to macroeconomics to social upheavals.
As companies announce 1Q 2022 results look and listen for signs related to core demand from customers, engagement levels etc. Look for comparisons with results against 2019 levels rather than Year over Year which is still distorted by the pandemic. For example, the Netflix story is not about losing subscribers, but about its response to increased competition as actually hours watched on Netflix increased by 7%. This is not to say that Netflix does not have challenges, but it is not as simple as the headlines say.
Here are some things to keep in mind as we all try to navigate the turbulent times ahead:
- Technology is a driving force moving investments, companies, markets, and the global economy. Look not so much at the technology itself, but at the business implications of that tech. For example, cloud technology represents a systemic change in the way companies operate and collaborate that is remains ongoing.
- All bets are off in the short term when turbulence compromises the ability of individuals and society to meet its basic needs. This is a significant concern given the impact of geopolitical factors on energy and more importantly food supply and markets. Food is a particular concern as the inability of a society to feed itself often leads to significant change.
- Growth is the long-term objective of the economy, society, and companies. Our personal, social, economic, and political systems tend toward decisions and actions leading to growth. While growth is not consistent, particularly in today’s environment, it is important to recognize the need for all of us to grow.
- Sustainability is an accelerating factor in growth. The S. Energy Information Administration highlights that global energy intensity has fallen by nearly one-third in the 25 years between 1990 and 2015. It is not enough to fully address global climate change, but it tells you it is not impossible, but very important.
Those are just a few thoughts, interested in what you see as the signals before the news rather than the rumors that seek to capture your attention.