Your Financial Future: Netflix And The Golden Age Of Stocks

Is Wall Street starting to realize what is going on in the world economy?

Questions remain about COVID-19; the virus is spreading again in many parts of the country, and there are back-and-forth changes to mask mandates.

The war in Ukraine is entering its third month. Russia is now saber rattling the possibility of nuclear war while North Korea is parading missiles that could reach the U.S.

Inflation is at a 40-year high with no end in sight, and the Federal Reserve Board has clearly stated that they will take aggressive steps to reign in these destructive price increases. Their actions are designed to slow economic growth.

Washington, D.C., remains deeply divided with no end of gridlock on the horizon.

The tech-heavy Nasdaq recently hit a 52-week low. One of the stocks that has led much of the growth for years recently suffered major losses. Netflix lost 35% of its value in a single day after reporting a surprising loss of subscribers in the first quarter.

When Netflix first started, they had a simple business model: distributing major movie releases after they quit showing in theaters. Initially, the company distributed the films by mailing out DVDs. They later transitioned into the streaming-only service used today.

There is a well-known business story where Netflix offered to sell itself to the much bigger Block Buster Video. The retail chain said they were just fine without owning Netflix, which later put them out of business. In fact, Netflix was so successful at distributing movies, that the big movie studios decided they wanted that business for themselves. To accomplish this goal, the studios quit giving Netflix access to their content and started their own streaming platforms.

To survive in business, Netflix had to start producing its own content. This is a much riskier proposal because every show or movie does not become a hit, and Netflix has to hire actors, crew, secure locations and buy scripts like the movie studios.

Wall Street rewarded them with large price multiples, saying streaming companies were worth much more than movie studios. In turn, this changed the financial landscape where traditional companies wanted to be viewed as high tech even if they were in basic business. It did not change the amount of corporate earnings, but somehow Wall Street valued them higher. These concepts have driven a 12-year Bull market.

Time will tell if it is worth it.

Bonds are supposed to be the safe part of your portfolio. Since January the bond market has performed very poorly. Long term bonds are down about 20%, intermediate bonds about 10% and short term bonds are down about 5%. This was to be expected because bond values go down when interest rate rise. The longer the duration or time to maturity, the larger the adjustment.

This means that many investors' portfolios are under a lot of stress. It is very important that you make realistic adjustments if necessary to match increased risk exposure, and the timeline for when you need the money.

We have been living through a golden age for the stock market over the last 12 years. Inflation was low and taxes were low. Boomers had lots of cash and had to put it somewhere.

This utopia cannot last forever. The question is, when will it end?

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, "Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility." If there is an area that you would like to see discussed in the column, send your suggestions to [email protected].