Tech Stocks Or Bust? Looks That Way. What To Do About It.

An eyes-wide-open look at the current stock market

If you have been investing for a few decades, you can’t help but dive into some data when you notice that the technology sector of the S&P 500 is performing better than nearly everything else. After all, that was the case in the late 1990s.

Back then, no one really knew what was coming next: a drop in that same market sector of more than 80%, from March of 2000 through October of 2002. These were the biggest, most-loved stocks on the planet during the 1990s. Tech stocks did rise again, for sure. But not until after 4/5ths of their peak value had been taken away from investors who had too much confidence for too long.

That return of the S&P 500’s Tech sector to those year 2000 price highs? It finally happened. In 2017! So, if you are like me, and don’t consider “breaking even” after 17 years to be a selling point for how to invest prudently, read on.

Let’s go back 20 years, then leap forward. After all, I think you will see that there are some patterns that, if you are a student of market history, should cause you to sit up in your chair.

What happened the last time

After spending the 1990s getting proverbially wined and dined by investors, thanks to this new thing called the World Wide Web, this happened. Keep in mind that these were not little companies. They were, in fact, the biggest. They had become so, and at the expense of the rest of the market. Tech was a ridiculous 37% of the entire S&P 500 as of early 2000.

The climb to break-even…17 years later

The return to the old year 2000 highs took as long as a child goes from crawling to high school graduation. How’s that for perspective?!

Today’s market: tech versus the rest

This is the picture that got me thinking about this whole subject. The past 12 months have seen a historically-wide out-performance of the S&P Tech sector versus the average stock in the S&P 500, including those Tech stocks. In fact, we have not seen a 28% margin of out-performance for tech (57% to 29%) since…wait for it…around 2000. Even before the Financial Crisis of last decade, the gap only reached about 15%. It hit that area again in late 2017, right before the bull market stalled, and the Tech sector fell over 20% through during 2018. That lead the broad market down with it, as you would expect when the market leader falls off like that.

S&P 500 Tech versus S&P 500 Not-Tech: different planets

Over the past 3 years (2017, 2018 and 2019), The S&P 500 Tech sector essentially doubled in value. What about all of the other stocks in the S&P 500? Well, they gained 38% total over the same period. Certainly those are strong returns. But it is clear that for the last few years, your stock market return had more to do with how much exposure you had to the U.S. Tech giants.

Note also that 2 stocks (Apple and Microsoft) currently combine to make up 40% of the S&P 500 Tech sector. Translation: as those go, so goes the market. At least, more so than any other stocks or sectors I can think of.

Tech versus the rest

The last graph below shows that this S&P 500 Tech dominance is not limited to just other stocks in that same S&P 500 Index. Joining the Non-Tech Index below are the past 3-year returns of World stocks, Small Caps, and the S&P 500 Equal Weight Index. Note how they are all bunched together, miles below Tech.

Fun fact

How popular has the S&P 500 Tech Sector become? The ETF I used to track it above (symbol XLK) has over $26 Billion in assets in it. The ex-Tech sector of the S&P 500 also has an ETF to track it. The symbol is SPXT. Its asset level? $4 Million. This is all part of what moves markets late in bull cycles. The herd is thundering.

Going forward

Finally, consider that about 2/3 of the S&P 500 Tech sector is made up of only 10 stocks. And the dividend yield on that Tech sector? About 1.1%. So, if you are at all motivated by dividend income in your objectives, you can’t hold too much tech. This is at the crux of a lot of FOMO (fear of missing out) among investors. Their objectives don’t correlate with what is “working” the best over the past 3 years.

This is a good time for understanding that, and some soul-searching. Otherwise, you risk chasing a rabbit you are not likely to catch.

Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors