On April 19, 2022, an unexpected development occurred in the stock market. The stock of Netflix -- one of the most recognizable and trendy American corporations of our day -- plunged more than 25 percent after-hours following the company’s earnings report for Q1 of 2022.
The reason? For the first time since October of 2011, the company had reported a loss in subscribers -- about 200,000 of them -- citing its “relatively high household penetration.” In response, Netflix announced it will be forced to crack-down on password sharing as its subscriber growth has stalled. Meanwhile, the company’s earnings per share declined 5.9% year-over-year as its executives admitted that the Covid-19 induced business boost has largely worn off.
To date, in fact, Netflix holds the title of the S&P 500’s worst performing company of 2022. Compared with the index’s 13.2% loss as of June 8, the company’s stock is down more than 65 percent so far this year.
This same trend has been observed among the broader stock market, but is especially true within the once red-hot tech sector.
It seems that the stocks that have performed extraordinarily well in recent years are being hit the hardest. Much like the laws of physics dictate, in the financial world, what goes up, must come down.
Facebook, for example, a formerly trillion dollar company blessed with seemingly infinite opportunities for expansion and innovation, recently reported its slowest quarterly revenue growth in more than a decade -- now merely in the single digits. The stock of Facebook -- now rebranded as Meta Networks -- remains down more than 40 percent so far in 2022.
In a rare moment in modern stock market history, the darling FAANG stocks are showing signs of continued vulnerability, of cracks entrenched in their foundations.
These companies -- Facebook, Apple, Amazon, Netflix, and Google -- have served as models of growth and market dominance as they swelled to market caps in the billions. They are among the most recognizable and influential corporations of our day.
They have led the broader market with remarkable gains following the market downturn of March 2020. Google, for example, more than doubled its pre-Covid high when it topped $3000 per share in November 2021. However, the current year has not been as rosy for Google shareholders: shares are currently hovering around $2300 and are showing signs of short term weaknesses.
Though long-beloved for their unprecedented growth and economic influence, these corporations are having their sanguine prospects and comfortably valuations seriously tested. Stocks of companies that were just recently thought to be too “famous to fail” are recording sustained losses.
Apple, for example, is down as much as 18 percent year-to-date in June 2022, losing about 750 billion dollars in value. In November 2021, Apple recorded an incredible 3 trillion dollar market cap. Amazon had also lost 40 percent of its value in 2022 during its lowest point in the month.
It seems like something has fundamentally changed in the market and economic climate. We have transitioned from times of robust expansion to an age of constraints.
More broadly, I believe that this current financial landscape is strongly reminiscent of the 1970s. After the Vietnam War, the assassination of Martin Luther King Jr., and other economic, political, and social events, the country seemed to realize that there are, in fact, limits to growth. GDP, standards of living, productivity, and other economic metrics cannot keep increasing without bound, contrary to the reigning view of that time.
This emergent pessimism peaked in the mid 1970s, with the energy crisis burdening the national economy, and stagflation -- rising unemployment combined with high inflation -- ravaging consumer confidence and economic growth. It would take years for the economy to escape the recession.
In response, President Nixon abolished the Gold Standard as the value of the U.S. dollar crippled relative to its foreign counterparts. The national debt rose as the U.S. had to borrow more money and pay for expenditures. Meanwhile, the U.S. first developed a trade deficit as it became more dependent on foreign countries for its products.
Similarly, we, in June of 2022, are witnessing the similar slowing of corporate and economic growth in our time. Growth stocks, especially those in the tech sector, are the first ones to pull back and relinquish their gains. It is precisely those stocks that soared to record after record highs are coming down with fierce momentum.
Underlying the currently souring economic picture is record-high inflation. It’s over 8 percent in many states and is starting to put serious stress on consumers. According to a March 2022 public opinion poll, inflation is indeed “public enemy number one”, as President Ford said in a 1974 speech to the country, and 17 percent of Americans say inflation is the most urgent crisis currently facing the nation.
The deleterious effects of high inflation have been compounded with supply shortages that are negatively impacting various industries as the nation recovers from the worst of the Covid-19 pandemic. Additionally, the labor shortage is becoming particularly acute, costing
corporations billions in missed revenue. While demand is remaining high -- especially for services such as travel and restaurants -- public confidence and consumer sentiment has embarked on a downward trend.
As a nation, a majority of voters are convinced that the United States is on the wrong track. President Biden’s approval ratings are grim, dropping into the 30s in recent polls. The country seems to be losing its unity through its Covid-19 recovery. A gun violence epidemic threatens to divide the country further. People are losing faith in their leaders and growing restless. Crime is rising higher. What happens next?
Is a recession to follow? If the 1970s is any harbinger, it seems like we are headed to a period of pessimism, retreat, and an age where we have to accept our limits and own them before they’re able to own us.
Sources: