November 28, 2017
Technology stocks have helped to push the stock market to record highs, but companies like Facebook and Google aren’t helping the broader economy, said hedge-fund manager Michael Lewitt.
The Technology Select Sector SPDR exchange-traded fund that tracks high-tech companies has surged 33 percent this year, compared with the 17 percent gain for the S&P 500 stock index to record highs.
A handful of large-cap tech companies have jumped even more this year through Nov. 28: Google parent Alphabet is up 34 percent, Apple up 49 percent, Amazon.com and Facebook both up 59 percent, Microsoft up 36 percent and Netflix up 60 percent.
“The stock market values companies fueling the use of social media and advertising at exorbitant levels,” Lewitt said in the December issue of his Credit Strategist newsletter. “But while the profits and stocks of companies like Apple, Alphabet, Facebook, Amazon.com and Microsoft are skyrocketing, their businesses do not appear to be moving the needle on growth …. These companies are not focused on activities that enhance the productive capacity of the economy.”
Excluding the energy industry, U.S. economic growth actually slowed to 1 percent this year from 2.6 percent in 2015, according to UBS.Lewitt cites an analysis by Swiss investment bank UBS that pointed out how commodities companies like oil and gas drillers have had the most positive effect on U.S. gross domestic product this year. Oil prices this year recovered from a 13-year low, giving energy producers more incentive to drill.
That’s bad news for the U.S. economy, which needs investment in industries other than the energy industry to promote broad-based growth.
“Technologies that ostensibly make it easier to communicate (texting, email, word processing, spreadseets, Power Point) are no longer translating into significant economic growth or productivity gains,” Lewitt said. “The economy is only marginally benefiting from social media technologies while Wall Street and Silicon Valley are profiting immensely.”
Technologies that help the economy include new drilling technologies like hydro-fracking, healthcare, biotechnology (which is aided by artificial intelligence) and improvements to the productivity and safety of factories, he said.
Lackluster growth in wages and consumer spending since the 2008 financial crisis also suggests a fragile economy even as confidence has risen.
“While consumer inflation measures are low, many necessities such as healthcare and education saw ever-rising prices since the financial crisis,” Lewitt said. “Instead of income, consumers appear to be using borrowed money and government handouts to make ends meet.”
Consumer confidence reached a 17-year high in November, with optimism ticking higher for the fifth straight month, according to the Conference Board. People felt better about the jobs and the business environment.
Lewitt doesn’t see the Republican tax plan helping the U.S. economy by encouraging companies to invest in growing their operations. Even immediate expensing of capital expenditures like research and development are mitigated by a planned cut in the corporate tax rate.
“Because the bill requires to do nothing specific with this money, it will be used to repurchase more stock and increase dividends,” Lewitt said.
The Federal Reserve cut interest rates to record lows during the 2008 financial crisis to urge spending, punish saving and give consumers and companies access to cheaper capital. Corporations responded by boosting their borrowing to record levels while buying back stock and paying out dividends.
“This is money they didn’t spend on hiring more workers, starting new R&D projects, building new plants and buying new equipment,” Lewitt said. “Congress should create greater incentives for investment in intellectual and physical capital rather than financial engineering.”