By CCN.com: We’re halfway to a bear market, at least for tech stocks. On Monday, it was a FANG bloodbath as the tech-heavy NASDAQ index skidded nearly 2 percent lower. It’s now down ten percent from its recent record highs. But don’t rush to buy the dip. Things could get a whole lot worse for the tech sector – and fast.
The Game Has Changed
Over the past decade, tech stocks have crushed the rest of the market. Since the stock market bottom in 2009, tech stocks, as measured by the Nasdaq 100 QQQ ETF, are up 564 percent. Meanwhile, the S&P 500 and Dow Jones are up a more modest 305 percent and 280 percent, respectively. Over the past three years, tech is up 55% compared to just 30% for the broad stock market.
As the internet has replaced and disrupted more and more traditional business, it has led to gigantic gains for the tech titans. But tech won’t outperform forever, all cycles end. Antitrust regulation looks like the trigger that will spoil the party.
Suddenly, investors can’t imagine endless blue skies for tech stocks anymore. Now they have to think about very real limits to growth, and how the government may fine, regulate, or even split up the largest firms. NYU Professor Scott Galloway, for example, is now predicting that the four largest tech companies will be broken into quite a few smaller chunks:
So far, the losses for most leading tech companies have been manageable. But as this table shows, tech leaders like Baidu and Tesla have taken far bigger hits:
With the specter of these tech firms facing regulatory pressure for years to come, some investors will surely want to sell the FANGs before they turn into the next Baidu, Tesla, or Twitter.
Antitrust Fears Will Haunt Tech Stocks For Years
Notably, the government began attacking Microsoft’s monopoly with its operating system in 1998, when tech stocks were booming. By 2001, when the antitrust enforcement action against Microsoft finally ended, tech stocks had cratered. There are two takeaways from that. First, this antitrust scare won’t end anytime soon. And two, it could be the early warning that the sector’s current boom has run its course.
Don’t assume the upcoming presidential election will make matters any easier. There appears to be bipartisan support for cracking down on the tech giants. Democratic presidential candidate Elizabeth Warren, for example, would almost certainly continue the fight if she replaced Trump in the White House. Earlier this year, she stated:
“Today’s big tech companies have too much power — too much power over our economy, our society, and our democracy. They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else. And in the process, they have hurt small businesses and stifled innovation.”
Software Stocks Under Fire
Software-as-a-Service “SaaS” stocks also plummeted on Monday. A basket of SaaS stocks fell nearly 5 percent on the day. SaaS companies such as Salesforce have grown for years while earning meager profits on the expectation that they can jack up prices later once they have an effective monopoly. That business plan looks riskier now. Also, the exit strategy for many of these SaaS firms is to sell themselves to a tech giant. That idea goes out the window if the government stops the tech leaders from getting any larger.
The mention of SaaS as an antitrust victim also led to an epic Twitter beef. Chamath Palihapitiya, famous for owning part of the Golden State Warriors along with being a bitcoin disciple, took umbrage at the claim that SaaS stocks would be in the line of fire:
So far, however, Chamath is losing the argument. SaaS stocks got decimated on Monday, with companies like Salesforce suffering outsized losses. For many funds, SaaS stocks have been one of the few winners in a bleak field. Thus, the sudden downturn in the sector could lead to rapid selling as fund managers have to scramble to lock in their remaining gains.
One thing is certain. Tech stocks are rapidly turning from the must-own market leaders into lepers. Given the phenomenal run in tech stocks over the past decade, there is a lot more room to fall as the pendulum swings away from the sector.