By David Forest, editor, Strategic Investor
We’ve never seen anything like it before.
It’s a flashing red warning for anyone who’s profited from the stock market this past decade.
I’m talking about the fall of Facebook, now known as Meta.
It happened on February 3 (exactly two weeks ago).
The evening before the fall, Meta announced its Q4 earnings. The numbers looked decent. Profits came in slightly below expectations, but still strong on over $33 billion in revenue.
No one expected what happened next.
When trading opened the next morning, the stock crashed. Meta’s share price fell an astonishing 26%. The plunge wiped out $230 billion in shareholder wealth.
All in a few hours.
In the weeks since, analysts clawed through the wreckage.
Everyone’s been trying to figure out: what went wrong?
Why Tech Stocks Are in Trouble
There’s no obvious answer. Meta’s profits were strong as ever. The company forecasted a slight drop for the current quarter, but nothing on par with the stock’s 26% shellacking.
It left investors scared.
How could a giant of industry tumble that much, that quickly… for no apparent reason?
The answer is: there is a reason.
It’s just not what most investors think.
The real reason for Meta’s big fall hit the news a week after the company’s earnings announcement.
This reveal didn’t come from Meta. It didn’t even come from a tech company. Nor from an investment bank or anyone on Wall Street.
It came from the Bureau of Labor Statistics (BLS).
On February 10, the BLS put out its survey of consumer prices.
The numbers shocked analysts and investors alike…
In January, things across America got very expensive. Rates for everything from beef to cars to hospital stays exploded during the first month of 2022.
All told, living costs surged 7.5% during the month. That’s the biggest jump in prices we’ve seen since Ronald Reagan and Paul Volcker famously battled inflation in the 1980s.
Few investors connected this grim news with Meta.
But these rising prices are the key reason why tech stocks are tanking.
Everything Is Going Up…
Meta is – at its heart – an advertising company. It wins most of its revenues selling ads on social media websites and apps.
That’s the problem. Prices for ads aren’t going up fast enough.
Advertising is a competitive business. Giants like Meta work on thin margins. There isn’t room to raise rates without losing market share.
Now, ad revenues are rising a little with inflation. This year, ads will probably get 4.4% more valuable according to media watchdog ECI.
But put that in context. Prices for everything else are rising 7.5%. That means advertisers like Meta are losing value as costs rise faster than cash flows.
Owning Meta, you’ve got front-row seats on a sinking ship. Rising costs will erode profits throughout this year.
That’s a potential death spiral.
It’s not just Meta, either. Most tech companies are in the same boat. Their business models don’t allow prices to rise and keep up with soaring costs.
This will hit some of the biggest names on the stock market. It goes beyond tech. How about airlines? Fares are rising 4.9% according to BLS – but input costs like fuel are soaring up to 40%.
Same in healthcare. Prices for hospital services rose 3.6% in January. That’s not even half the rate everything else is going up.
Alcohol, clothing, fruits, and vegetables. None of them beat the 7.5% needed just to tread water in our new economy…
How to Prepare for This Trend
So what should we do?
Look for sectors that are beating the wider economy. Meat prices, for example, are rising 12.2%. That means beef companies should profit from today’s price explosion.
Natural gas surged 23.9% in January. That handily beats the average, meaning natural gas firms are growing their margins.
Electricity, oil, automobiles – all of these grew faster than the wider economy. It’s critical to be in sectors like this, riding the wave of higher costs.
The rest of the stock market? It’s going to see profits mysteriously shrink. Come earnings day, we’ll see more stocks suddenly tanking like Meta.
Don’t ignore this trend. It might be the most important factor in making – or breaking – your money in 2022. Maybe for years to come.
To help prepare, I’ve launched a special briefing with all the details on prepping your portfolio. What to buy, what to sell, and what to avoid like the plague.
I urge you to take five minutes and listen to this backgrounder. Don’t be the next investor to wake up and find their nest egg down 26% overnight.
Keep walking the path,
Editor, Strategic Investor
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About Legacy Research Group
From the beginning, independence has been the key to our success. Unlike the mainstream press, we don’t make our money from corporate advertisers. And unlike Wall Street, we don’t take commissions or fees from the companies we cover in our newsletters.
Instead, we offer ideas, opinions, and recommendations.
Our mission is to provide readers with a broad view of the world. So, we ask questions. We research and test. But we do not claim to have the last word on every issue. We explore ideas with our readers… so they can decide for themselves.
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