The Influence Of Technology And Growth Stocks
Updated: Oct 7, 2020
Our goal is to help clients understand how narrow the returns have been this year for our clients. There are nearly 3,700 listed stocks in the United States. Yet, the rebound in stock prices that we have seen this year has been driven by only a handful of technology and growth stocks such as Apple, Amazon, Microsoft, Facebook, Netflix, Google, and Tesla. Collectively, these stocks contributed virtually all of the S&P Total Market Index gains, an index designed to track the broader equity market.
The technology sector is the year-to-date leader in the market, while the rest of the market has been down, on average, when excluding those seven stocks. At a market capitalization of over $400 billion, Tesla is now worth almost six times the amount of Ford and General Motors combined, despite producing one-tenth of their annual revenues. While Tesla is a great company and is far more than an automobile corporation, we need to be careful about what we pay to own the future potential.
Many investors view these and other growth giants as safe havens that will continue to deliver steady profits and stock market gains. They have captivated investors' attention, but it is important to ask the question – do these valuations make sense? Not since the tech bubble of the late 1990s has the market been so dominated by only a handful of richly valued stocks. Back then, it was stocks such as Microsoft, Intel, EMC, and Cisco. They were the market leaders in 2000, and while almost all of these companies remain leaders in the industry, Microsoft is the only one that has regained its value, and it took 15 years to do so. Now, twenty years later, their stock prices remain significantly negative despite substantial continued business success. At the height of the dot-com era, technology stocks accounted for over 35% of the S&P 500's value. Today, the tech sector accounts for about 25% of the index and has worried many in the industry. While valuations of technology and growth companies are not as "frothy" as they were in 2000, the lesson remains that valuations and fundamentals are critical to the long-term preservation of wealth and success in investing.
Hardly a day has passed in 2020 without a client or two sharing a stock tip. I genuinely appreciate information and ideas on the latest technology or biotech company coming to the market, and we research every idea presented. I am delighted when clients take an interest in the investment world. That being said, investors must be careful about investing in the hype surrounding a new IPO or a new way of doing business. Frequently, these companies' stock prices are bid up well beyond the worth regardless of its success they may be experiencing. As I have written previously, we want to find the "green shoots" of the next economic expansion. We believe in these companies; however, it is important to remain disciplined and not overweight portfolios. We only need to look back just a few years ago to the substantial losses investors experienced investing in the stocks related to the legalization of marijuana. It is essential to understand the difference between a great company and a great investment.
As we begin October, U.S. stocks are seeing losses in recent weeks after five straight months of gains. These technology and growth stocks will continue to influence the market indices' performance, given their strong weighting, and investors need to be aware of their impact. Even with the recent sell-off, the technology sector has still been a strong performer this year. We need to pay attention and continue to look at the fundamentals of the stocks we purchase. It remains today as it has always been; there is no quick and easy way to design an investment portfolio - patience, broad diversification, and fundamentals matter.
While there are no guarantees, I continue to believe broad diversification of a portfolio remains the best way to avoid permanent loss of capital, and continue to provide our clients the downside protection as we have been able to do in previous downturns. This strategy has been true throughout history and my career.