Stocks: Haves and Have-Nots
Befitting recent times, even stocks are polarizing. While investors are enjoying record returns, an unhealthy schism between technology-oriented growth stocks and “old economy” stocks are well advanced.
We see below how a small set of mega-cap technology growth stocks is creating a schism and distorting results. A year ago, these technology stocks began dominating returns, pulling the cap-weighted index well above the version which keeps all stocks of equal size. Since then, the market cap weighted index has returned 14% to the equal weighted return of 3.7%. The Covid-19 affair with its assorted lock-downs has boosted technology and hindered the old economy.
Since 48% of the Nasdaq 100 Index is composed of the 5 tech stocks that now dominate the S&P 500, its performance shows us the source of the schism. Its 44% return towers over both broader market indices.
Client Take Away
John Maynard Keynes famously said, “The market can stay irrational longer than you can stay solvent”, by which we mean to suggest that this unbalanced, irrational polarization may remain for an indefinite time. But it will resolve itself, wholly or completely in one of three ways: The “old economy” stocks will stage a mighty catch-up rally, the Nasdaq 100 will regress to its mean by lagging significantly, or a combination of these two.
Take profits in the Nasdaq 100 stocks. One can never go broke taking a profit, even during polarizing times.
Dave Magee
David enjoys meeting clients and providing them with investment and retirement strategies customized to their current and future lives. He delivers over 25 years of investment management practice to his clients and has hands-on experience in wild bull and bear markets and every market environment in between.
