Tech and the Market (06/13/2017)
The S&P 500 is generally used as a gauge of the overall stock market. It also has some rather unique qualities. It consists of 505 stocks, which are weighted so that the top 40 stocks make up approximately 45% of the value of the index. In and of itself, that is not so bad considering the Dow Jones Industrial average has only 30 stocks and is also considered a key measure of how large stocks are doing.
Currently, the value of the S&P 500 is dominated by technology stocks. According to the Wall Street Journal, about 25% of the index’s value is in technology stocks. However, technology stocks tend to be very volatile. This happens for two primary reasons: investors see rapid growth of these stocks, making the price per share increase, and tech stocks generally do not earn substantial gains relative to the stock price. In other words, investors tend to buy these stocks with the belief that over time their earnings will catch up with stock prices. These are your ultimate “growth” stocks, where real value is low but implied value is high.
If we look back to the late 90’s we saw tech stocks rapidly rising in price, only to be followed by a devastating collapse in 2000. On Friday, June 9th, there was a tech sell-off with prices tumbling. This was followed on Monday with another sell-off. This does not imply that the five major tech stocks: Apple, Microsoft, Facebook, Google, and Amazon are finished. This simply means that there has been an adjustment in balancing growth and earnings. For those who simply bought the S&P 500 index many probably were not aware of the extent of their exposure to tech stocks.
With broader diversification, a well-managed portfolio takes such exposure into consideration to mitigate risk. I am apt to repeat that there are three rules in investing: diversify, diversify, diversify!
June 13, 2017