Tech Is Waking Up

 Employee layoffs have been growing more frequent, especially from companies in the Technology Sector. Some may recall, during the pandemic I wrote about a growing incentive to reimagine the corporate responsibility. The narrative was aggressively pushed by Marc Benioff of Salesforce (CRM), highlighting the goal to hire aggressively, pay handsomely and provide added capital to the working conditions and the needs of the community that hosts the business. The statements being released by companies leading the recent layoffs are the same ones that followed a narrative that was projected with sound intent but ended up creating more problems than benefits to the economy and the capitalism that feeds it.

 I bring this up because another familiar phenomenon is occurring as stock prices of these companies are going up, essentially rewarding them for preserving the future needs of the company and the balance sheet, over the present high Operating Expenses. In the case of Alphabet (GOOGL) and Microsoft (MSFT) the CEO’s each gave an unexpected apology for being too aggressive with the pandemic agenda. Now the economy is weakening to the impact of higher interest rates in the calculation of earnings per share (EPS) and the challenges to growing nationalization of infrastructure and technical select needs to fight ongoing supply trade disruptions, and a more serious focus on the balance sheet is needed.

 While this is happening, the economy as also measured by housing, retail sales and broad manufacturing, is experiencing multi month weakness. The offset that comes from strong employment is a nuisance observed by the Fed and that is a current uncertainty. Until the next meeting on February 1st, and their forecasted .25% rate increase, it’s the speech by Chairman Powell that follows that I’ll be focused on. As the Fed concerns become clearer, so to can the overall market takeaway. There is no reason yet, in my opinion, to not expect a recession in the second quarter, but it will take evidence from incoming employment data and its broader impact to feed the agony Chairman Powell has promised.

 The good news, in my opinion, is that the equity markets are opening the year moving higher. But the strength, and incoming investment, is clearly focused on technology, and not just the familiar names. To some extent this could be a short term shift from the more stable sectors that have been the recent winners in the markets, and in need of some pause.  But with much of the forementioned employment data dependent on continued cost cutting, coming from the Technology sector, the outcome is clearly good for the sector as a whole. In my opinion, this is an early sign that Technology is closer to the end of a very difficult 12 months. As far as where investment is focused, the growth in Artificial Intelligence, Robotics, Cybersecurity and Cloud Services, covers a lot of ground and we have some exposure to all. With that, the goal is to take advantage of volatility, probably from upcoming earnings reports, to increase our holdings.  For now, the overall technical condition is still overbought and when the markets work off some present steam, then it can move towards rising on a favorable outlook instead, and that’s the kind of market we like.