You could have slept through the first seven months of the year and you’d never know anything happened judging by major US benchmarks.
The S&P closed positive for 2020 on Monday and the Nasdaq 100 hit a fresh record high. “What pandemic?”, asks Rip Van Winkle, whose portfolio consists solely of large-cap US equities. Call it a “bubble” or a summer “melt-up” or whatever you like, just as long as you call those who said a re-test of the March lows was imminent, wrong.
If you were wondering whether the Nasdaq 100 would get its swagger back after trailing the S&P by the most on a weekly basis since 2009, the answer was a resounding “yes”. Tech outperformed by more than 2% to kick off the week.
After the bell, IBM beat estimates, sending the shares sharply higher. Also on deck this week are Microsoft, Intel, and Twitter.
There was no obvious reason for investors to fade the rally. Fraught negotiations around Europe’s €750 billion recovery fund appear set to end in a compromise and the soundbites out of Washington produced no new surprises. Fiscal hawks on both sides of the pond will go through the motions, but obstinance and recalcitrance will be seen for exactly what they are — an act and an empty threat in the face of the most severe crisis in a century.
And yet, even as more stimulus is assured in the US, and despite Europe taking the plunge into fiscal burden sharing, the rally in big-cap tech is suggestive of investors’ penchant for sticking to a defensive posture.
Yes, there’s something profoundly absurd about stretched tech names counting as “defensive”, but remember, that’s the zeitgeist. It’s been that way for quite a while. The pandemic just cemented the case by giving people a health-based excuse to avoid human interaction and further immerse themselves in the digital realm.
The tech titans are effectively utilities now. They are also the most reliable place to find growth. The figure (below) is from May, but I like to roll it back out whenever the opportunity affords itself.
Without the biggest five companies, the S&P 500 would be down more than 5% this year.
I’ve also used the set of charts below previously. They’re from Gerard Minack, who combines FAANG with FAAMG to get FAAANM (Facebook, Apple, Amazon, Alphabet, Netflix, and Microsoft).
FAAANM is almost solely responsible for sales and profits outperformance in US stocks. When you strip those out, corporate America hasn’t done much better than “corporate world”.
Big-cap tech benefits from a “heads I win, tails you lose” dynamic. It holds up better on risk-off days, but also does fine when the mood is risk-on.
Just about the only time tech severely underperforms is when the re-opening narrative gets an adrenaline shot, either via upside data surprises or encouraging headlines around vaccines and/or therapeutics. The Nasdaq 100 now trades at the largest premium to its 100-DMA since the dot-com bubble.
Tech earnings may or may not derail things. Netflix stumbled hard last week, and there’s a case to be made that “old” tech might be a safer bet than “new” tech going forward (see here).
But each and every time big tech gets tripped up, it bounces back stronger than before. Nothing — not regulatory worries, not ridiculous multiples, not overt threats from politicians, not privacy breaches — seems capable of short circuiting the perpetual motion machine dynamic driving these names inexorably higher.
I’ve joked previously about an “infinity rally” in the sector. While it’s possible to posit a number of mildly bearish scenarios, one thing I haven’t heard from anyone, anywhere, is a convincing argument for why investors should abandon the big five en masse. Put differently, there doesn’t seem to be an aggressive bear case for mega-cap tech in a world where the same handful of companies are, in one way or another, embedded in virtually all aspects of social interaction and commerce. It’s an oligopoly over almost every facet of human existence.
If I just rang the bell at the top with that assertion, I’ll be absolutely fine with it.
Instead of seeing it as a “defensive” play, there’s another way to look at equity investors’ love for U.S. (and Chinese) big-cap tech: it’s a tacit acknowldgement that COVD is accelerating myriad social and economic trends, and one of the winners in that evolution is going to be tech, of all kinds, but especially mega-cap tech. The only thing that changes that is if U.S. lawmakers/regulators work up the nerve to apply existing anti-trust laws to the likes of Apple, Alphabet, Amazon, Microsoft, etc. They won’t, and those companies will continue to dominate and eliminate their competition.
Although you’ve expounded on these ideas in previous articles, I think this one provides the most succinct synopsis of why big cap tech is defensive under current conditions and also essential. A classic HR piece de resistance.
H-Man, do you remember when you had that smoke and bought some mutual funds when the world was ending. We are there again. Back then we could go to the Bahamas, not so today.