Most people would associate the term 'junk' with stuff they don't need. In fact, the dictionary defines junk as:

"old or discarded articles that are considered useless or of little value" as in "the cellars are full of junk"

So we're all on the same page. But are we? This latest tech rally is becoming know as a "junk rally", what does that mean?

There was a big tech sell off in 2022 and the Nasdaq was down significantly on the year. But so far in 2023 we've seen a resurgence in the tech sector and correspondingly the NQ is up by 16% (at the point of writing).  But you'd be wise to look under the hood of this rally. And if you do you'll find that this year's surge in technology stocks has not been in the traditional technology stocks that we know and love e.g. Alphabet, Amazon, Apple, Meta etc.

The surge this year has been in much earlier stage tech businesses, in riskier areas of the market whose products are unproven. Moreover, because these businesses are in the start-up stage they are also unprofitable and require a lot of funds to grow.

The appearance of ChatGPT from open.ai has a lot to do with the excitement. The unveiling of their product and interest from Microsoft means that any company that has anything to do with AI (Artificial Intelligence) is now seen as an exciting investment opportunity.

This is because the In the world of finance everybody wants to make money and then make more money. As Gordon Gecko said, in the 80s film Wall Street "greed is good". So even though many of these companies don't have a product yet and are burning cash, the market wants to invest in their potential. And it's not just AI; crypto firms, unprofitable software developers and businesses with links to electric vehicles have all seen their value rise.

These increases cannot be based on fundamentals because these businesses are unprofitable. These are therefore risky investments but that doesn't mean they are likely to have a higher return. What we're seeing can only be described as speculation and in the words of Jim Smigiel, Chief Investment Officer at SEI Investments Co. "this is massive speculation, and it is going to burn itself out quickly because there are no fundamental drivers behind it".

There are strong parallels here with the rise of reddit driven meme stocks: speculation driving price rather than the bottom line value of the business. But in a time of inflation where money supply is tighter than last year in a market where most analysts have a 2023 focus of show me the money, this can only lead to tears.

Be wise. Do your own research and invest according to your own risk profile. If something looks too good to be true then it usually is.

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USEFUL LINKS: Why are Economic Forecasts Wrong, US Stocks in 2023, Your best shot at Goal, Learn to Earn, Looking for a good stock to buy, What is Inflation?, How interest rates work