The cyclical nature of technology and its correlation with economic prosperity has long been a topic of debate and analysis. The recent tech boom, driven by soaring tech stock prices, has captured the attention of investors and analysts alike. However, it is important to look beyond surface-level indicators and understand the broader implications for the economy.
While the Nasdaq index, a key indicator of the tech sector’s performance, has shown significant growth over the past year, other indexes tell a different story. The Russell 2000, which tracks small-cap stocks, has remained stagnant during the same period. Even the widely-recognized S&P 500, excluding a select few tech giants, has experienced a much-reduced rise. These observations suggest that while the future of tech may be promising, the market may be pricing in a more distant timeline for significant earnings.
Looking at historical examples, we see that advanced tech alone does not guarantee economic prosperity. Japan experienced a tech boom in the late 1980s but faced two lost decades following the burst of the economic bubble in 1990. Similarly, China’s tech sector, particularly in artificial intelligence (AI), has been thriving in recent years. However, predictions of an impending collapse reminiscent of Japan’s experience seem to be coming true. This evidence suggests that tech alone is not sufficient to drive sustained economic growth and that an economic bust can have long-lasting effects on the tech industry.
It is important to recognize that while tech plays a crucial role in sustaining an empire, its long-term advantage does not protect against short-term cyclical or structural downturns. Tech ultimately serves various sectors of the overall economy, and any economic downturn would theoretically reduce demand for these technologies. In simpler terms, tech’s advancement should ideally be positively correlated with the economy.
Analyzing the correlation between U.S. real GDP and the Philadelphia semiconductor index (PHLX), we can observe a clear connection between the two in the medium-to-long term. The boom-bust cycle of the economy appears to govern the semiconductor activity, with the exception of the artificial recession caused by the COVID-19 lockdown. However, it is important to note that tech is a highly volatile investment, ten-fold more volatile than the overall economy. The scales of the two vertical axes in the chart demonstrate this volatility.
Comparing the pre-2001 era, known as the dot-com bubble, with the present, we can see that the semiconductor index’s year-over-year change was much more volatile and detached from the GDP’s year-over-year change. In contrast, the two are now more comparable, indicating that the market has become more realistic about tech compared to two decades ago.
However, it would be unwise to predict one from another, as there is potential bilateral causality at play. Just because the tech index is performing well at the moment does not guarantee that there will not be an economic downturn in the future. These indicators suggest that while the U.S. may likely continue its tech empire, it may not be shielded from an economic downcycle.
Examining other tech indicators, such as the stock price of Nvidia (NVDA), would yield a similar picture. Based on these observations, it is safer to argue that the U.S. will likely maintain its tech dominance rather than claim absolute protection from any future economic downturn.
In conclusion, while the tech boom and its impact on stock prices have garnered attention, it is essential to consider the broader implications for the economy. Tech alone cannot guarantee sustained economic growth, as demonstrated by historical examples. The correlation between tech and economic prosperity is evident in the medium-to-long term, but caution must be exercised when predicting one from another. The U.S. may continue to thrive in the tech sector but remains susceptible to economic downturns.
