During turbulent times you often hear cliches. One of my least favorite sayings is "This time it's different", generally followed by some really awful financial advice. The good news is that I am not here for that. I do, however, want to address what seems like an anomaly on the surface. Why during a very volatile time in the market are technology stocks up while the traditional blue chip stocks are down? Shouldn't technology stocks be getting crushed during a recession? Shouldn't we be moving into defensive stocks? What is happening?
As of Friday May 22, 2020....... the Nasdaq is UP on the year 3.92%. The S&P 500 is down 8.52%. The Dow is down 14.27%.1 One would think that in times of crisis, companies in the Dow would be solid, while the Nasdaq would be struggling due to the fact that it tends to be tech heavy. That is simply not the case. Currently, over 20% of the S&P 500 is comprised of just 5 tech companies (Microsoft, Amazon, Apple, Google (Alphabet class A and C), and Facebook). Leave these 5 stocks out of your portfolio, and you are down significantly more than you otherwise would be. If you would give each of the companies in the S&P an equal weighting, the index would be down almost twice as much, close to -16%! It is my opinion that these companies have become the new blue chip stocks of the current era. They are becoming like utility companies - can you imagine life without using products or services from one of those companies? We are completely reliant as a society on them. Gone are the days when AT&T, Exxon Mobil, and General Electric ruled the world. We have ushered in an era where Microsoft, Amazon, Google, Facebook, and Apple rule the land.
What does this all mean? While at one point, conservative investors were afraid of technology, they now need to rethink the place of technology in their portfolio. Not all that long ago tech companies were burning through cash, highly levered, and constantly needing to raise capital. Now big tech is cash rich, printing money, paying dividends, and buying back stock. Further, they have proven that even in times of crisis both people and dollars will flock to big tech, at the expense of most of the rest of the economy. It is becoming more and more difficult to justify leaving big tech out of a portfolio, however conservative it may be.
Did you miss the boat? Are they priced too high now? That is hard to say in absolute terms. I hate advising people to run out and buy stocks near 52 week highs. My suggestion would be to make a decision on what percentage of your portfolio should be in tech and gradually work your way up to that level. I am not recommending buying tech because it's hot (this is always something that we caution against). I am suggesting that you take a look at how you fundamentally feel about investing, and how you should consider technology differently than you may have in the past. Times have changed. These stocks are no longer high risk stocks that you throw some money in and hope that they grow into their lofty valuations. These stocks are now legitimate blue chip companies and an integral part of our society, and will be for the foreseeable future. They have figured out how to make money in good times and bad. They no longer need to constantly be raising money. They have giant war chests full of cash. Society depends on them. Tech isn't tech anymore.
Should you wish to have a complimentary analysis of your portfolio and the role that technology should play in it, please contact our office. Thank you for reading!
Scott Shrader
1). Wall Street Journal, May 23, 2020