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— Bulletproof tech–the Nasdaq composite and ’s made new all-time highs Friday 13, 2024. — The heavily “Magnificent Seven”-weighted S&P 500 (approx. 36% of the index’s total market value in “Mag Seven names”) is down less than 1% from its record high recorded a week ago.— Everything else seems to be in for liquidation … the Dow (minus 3% in the last week, the S&P 400 (- 4% from its all-time high 11/25) and the Russell 2000 (minus 4.4% since its all-time high, 11/25/2024).— Concerns over the Fed signaling a slower path to materially lower rates and continued worry over the new administration’s trade and immigration policies send economically sensitive stocks lower.— We seem to have reverted to the market default mode of avoiding the economically sensitive and investing in predictable (?) growth.— How to play the year-end cross currents
Bulletproof Tech
It’s year-end and normally stocks are buffeted by year-end strategies, tax loss selling or profit taking, taking a few chips off the table or institutions dressing up portfolios with proven winners. So far this year feels a bit different. There appears to be no end for the demand for tech shares with the Nasdaq composite and QQQs continuing to make new all-time highs while everything else goes in the dumpster.
Why?
The first couple of weeks after the election the market seemed to embrace everything … large cap, small cap, value and growth on hopes for reduced regulation and tax cuts. This has now turned into concern about the economy, not because of weakness in the current data but, maybe, a growing concern over the incoming Trump administration’s trade and immigration policies and a Fed reluctant to lower rates too quickly.Regarding tariffs, I believe their use in a targeted, surgical manner may be order. However, using tariffs as a blanket, covering all imports is entirely silly and would certainly be inflationary. I’m not sure that Trump 2.0 will be as pliable on these issues as he was in his first term. This is a risk that creates uncertainty. The market hates uncertainty but that uncertainty seems to be falling on the backs of everything but the “sure” winners in technology.Regarding immigration policy, Let me make clear I believe we need controlled borders. By the same token the idea of ejecting some 10 million interlopers, some of whom have been here for decades, seems to be, at best, misguided. We need the bulk of these productive, in-many-cases tax-paying non-citizens to do jobs many Americans won’t do … like the hombres on my neighbor’s roof this morning working in the freezing cold to complete their task. None of them, except the foreman, habla ingles. Another point is that many have graduated from the lowest level of employment and successfully integrated into our economy, becoming skilled workers and business owners. What would their absence do to labor costs and, at the lowest levels, the price of California produced vegetables?
Mag Seven Rules
With approximately a of the market cap I think it is safe to say rule that index … for that matter, the entire market. these seven stocks are trading at 40 times estimated forward 12 month earnings (See note at the bottom of this paragraph if having trouble accessing link). These numbers on PEs depend on what your estimates are for earnings. of Yardeni Research (a bit less conservative) spots the forward 12 PE at 30.9 for the Mag Seven but only about 16.5 for the mid and small cap S&Pindexes. (both the Morningstar and Yardeni pieces may be viewed directly on their respective web sites).To be certain these numbers on PE are not as crazy as the entire S&P attained in 2000, 50 times earnings, but they are high and concentrated in a very few names. Also, unlike the internet bubble, these are all real companies. However this type of concentration and group think is worrisome. We have seen it before and it never ends well.
The broken record or stopped clock
I prefer to be the stopped clock. At least it’s right twice a day. I have been harping on this idea of the market broadening out for the better part of two years and it has to a degree. Witness the Russell 2000 finally making making a new all-time high November 25th. It was an arduous grind as the previous record was attained 3 years ago. Meanwhile, the market in terms of the S&P 500 and Nasdaq composite has been on a continuous run to new all-time highs for the past two years.Why the divergence? I believe many investors have come to believe, as it pertains to the economy, interest rates rule (not the huge influx of liquidity–stimulus–we have had over the past five years). Continuing high rates versus those which we enjoyed (and needed) during the aftermath of Great Recession and the pandemic are perceived to be a big risk for the economy. This belief has continued in the face of compelling evidence to the contrary … the economy doing just fine with the Dow, S&P and Nasdaq at or near all-time highs. So when chairman Powell talks about going slow on raising rates those unwarranted fears are reinforced and money exits the economically sensitive areas and continues to pour into that which is perceived not vulnerable (of course eventually it will be), technology. As it is with everything stock market and cyber currency, higher prices seem to create demand with the converse, lower prices, creating supply.My post does not advocate wholesale liquidation of your tech holdings, just a bit of trimming, taking some chips off the table, and repositioning in some of the mid-cap and smaller names that have recently gone begging.Unless human nature has changed, there will be a new default investment group eventually. Meanwhile, there are a lot of interesting companies out there that are being given short shrift because of the market’s narrow focus on technology and the misperception economic risk. Therein lies the opportunity for new investment. The year-end selling of disappointing names (in many cases based on emotion rather than rational analysis) magnifies this opportunity. What is your take?More By This Author:
Market Default: Buy Tech
