August 10 2018 Market Update

Tech Titans

The S&P 500 gained 3% in July and the Dow rose 4.7% for the month – the best monthly performance since January.^[1] Year-to-date, the S&P 500 is up 6.4% and the Dow is up just shy of 3%.^[2]

But underneath that news was a bit of excitement – and even some record-breaking numbers. The drivers? Our modern “Tech Titans,” which have become some of the biggest companies in the US which provided significant fuel to the bull market in recent years.

Here’s what the Tech Titans mean for your portfolio, and how the month in tech illustrates a few critically important lessons about being a long-term investor.

A Record-Breaking Month   

On July 26, Facebook posted the largest single-day loss in stock market history, losing $100 billion in market value on its relatively weak quarterly report.^[3] One week later, Apple became the first American public company to reach a $1 trillion dollar market value. ^[4]

Other technology names also had some trouble. Netflix dropped 14% in July on missed subscriber numbers. Some of its “FANG” stock peers (the group of tech giants that that includes Facebook, Google parent Alphabet, Amazon, Netflix, and Google) and other notable technology names, like Twitter, also fell on weaker earnings and downsized growth expectations.^[5]

With all this news, the tech sector of the S&P 500 dropped 2.2% over 8 days heading into August 1. On August 2, it jumped back up 1.4%.^[6]

This is what you might describe as volatility.

Now, we don’t advise hanging on every day, week, month, or even quarter of performance data. In our experience, it rarely serves investors to focus on short time-frames.

But recent performance in the technology sector illustrates something that we think is extremely important: the critical role of disciplined diversification in investment portfolios.

Tech Titans on the Rise

Today, four out of the five biggest companies in the S&P 500 are tech stocks: compare that to 2006, when the mix of top companies looked very different. These five names represent 14% of the S&P 500’s market capitalization.^[7] The tech sector as a whole powered 50% of the S&P 500’s $6 trillion growth since the presidential election in 2016.^[8]  

That leads to some important questions about risk.

While investors may have enjoyed performance benefits thanks to the FANG stocks and technology more generally, what happens if their fortunes change? Whether it’s because they reach a transition point and become mature and even boring, or because of increased regulation, or due to backlash, or any other number of factors – will the S&P 500 nosedive if the tech stocks fall?

We saw a small test of this question recently, and so far that hasn’t happened.

Despite some concerns about the growing importance of the FANGs and technology more generally, the S&P 500 took their recent tumbles in stride. That’s partly because not all of them underperformed: Amazon and Alphabet, Google’s parent company, both reported strong earnings this quarter.^[9]  

But it’s also because tech is not the only sector in the equity market, even in spite of its growing importance. Strong economic growth, continued job growth, tax cuts, and strong corporate earnings across sectors has helped boost everyone from oil companies to department stores.

At this writing, 400 names in the S&P 500 have provided earnings reports, and 73% beat expectations.^[10] With growth elsewhere, the impact of tech stumbles wasn’t as great as some worried it could be.

In our opinion, this is a great example of the power of diversification. If you only had Facebook in your account, or even just tech stocks, July might have been a very stressful month.

But despite the importance of technology companies in the markets and in our lives, they are not all-powerful – nor do they drive the performance of the entire market.

Will the Music Stop for Tech Stocks?

This is always the question, and our simple answer is that you just can’t know – and that is the central reason we advise an approach that prioritizes long-term diversification over short-term returns.

Technology firms have been doing very well and have provided a lot of the fuel for the last few years of the market’s performance. But in another few years it could be a different sector that outperforms.

By diversifying across the equity market – and then across asset classes based on your personal needs – you can access the benefits that come with strong performance in any single sector. But you can also get some insulation from the headwinds that could inevitably affect that sector in the future.

It’s age-old investing advice, but like most good advice, in the moment it can be difficult to follow.

That’s what we’re here for: if you’ve been wondering about your equity allocation and the role of technology in your portfolio, please get in touch and we’ll talk through the strategy and approach that makes sense for you.

JSF Financial