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What should investors do with tech stocks now?

by LLB Editor
8th Sep 20 7:43 am

Whatever the reason for last week’s slide – action in the derivatives markets, Tesla’s failure to make it into the S&P 500, the Fed’s no-longer-expanding balance sheet, worries about the lingering economic effects of the pandemic or a simple nod to racy-looking valuations – technology and growth investors now have three decisions to make,” says Russ Mould, AJ Bell Investment Director.

“First, they have to decide whether the actual fundamentals of the firms have changed at all, in terms of their competitive position, balance sheet, management acumen or strategy. Second, they have to take a view on why the share prices suddenly fell and whether it was justified. And then they have to decide whether this is a chance to buy on the dips – yet again – or a call to lock in what could be substantial profits.

“It is pretty hard to argue that anything has changed fundamentally over the past week and we won’t know any more about near-term earnings until the latest quarterly announcements in October (unless there are any surprise pre-announcements in the interim). Until now, investors have been content to pile in – or at least buy-and-hold – in the view that Facebook, Alphabet, Amazon, Apple, Netflix and Microsoft (the FAAANM sextet) are proving relative immune to the recession that followed the pandemic and that their ability to keep growing earnings means they are a scarce commodity that deserves a premium valuation.

“As legendary investor – and passive investing advocate – Jack Bogle once noted: “The idea that a bell rings to signal when to get in or out of the market is simply not credible.” Few if any bulls would have predicted where the FAAANM names would have got to this year (let alone Tesla) and bears have been run over by the phenomenal momentum gathered by the sextet, whose $7.5 trillion combined market cap is still equivalent to 26% of the S&P 500 index’s total value. It is therefore not clear why the FAAANM shares stumbled so badly last week and why gravity began to exert an influence.”

When valuations are so lofty – as some argue they are in this case – it takes little to create downward momentum and even tiny things like Tesla’s unexpected exclusion from the S&P500 index can make a larger-than-expected difference. It is certainly easy to make the case that the US stock market has become very lopsided. The FAAANM group’s $3 trillion market cap gain over the past 12 months represents 85% of the $3.5 trillion increase in the S&P 500 as a whole, which hardly looks healthy, at least so far as the other 494 stocks are concerned. Excluding the FAAANM names, the S&P 500’s market cap is less than 1% higher than it was in January 2018.

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