Can Anything Catch up to The Tech Sector?

At a Glance

  • Surging FAANG stocks make up 40% of the Nasdaq, which reached all-time highs in June
  • Trader, Economist panel asks, how long can big tech continue to carry the market?

As the market was bottoming in late March due to Covid-19, analysts and investors gave their predictions as to what letter shaped recovery the markets would see. From “I” to “V” to “Nike swoosh” shaped, it is anyone’s best guess how the broader market will recover from such a devastating couple of months.

Travel Down, Tech Up

The Covid-19 pandemic affected different sectors in different ways; dramatically impacting airlines and cruise lines and serving as a catalyst for some of the world’s largest technology companies. Perhaps the clearest indicator of how badly airlines have faired due to the Covid-19 outbreak is Berkshire Hathaway’s decision to sell all its airline sector holdings. At the time of the sale on May 1, Delta Airlines, United Airlines, and Southwest Airlines shares were -59%, -70%, and -46% year to date, respectively. On May 1, Amazon, Microsoft, and Facebook were +17%, +8%, and -4% year to date, respectively and have since gone higher. NASDAQ performance since the market bottomed in late March has seen the index reach new highs.

The Power of FAANG

The NASDAQ is a market cap-weighted index, meaning the larger companies have more effect on the index’s value. FAANG stocks currently make up over 40% of the NASDAQ, compared to around 20% of the S&P 500. According to FactSet, the NASDAQ entered positive territory for the year on May 11, while the S&P 500 and Dow Jones are still lagging as of mid-June. The discrepancy can be directly attributed to the heavy allocation of the FAANG stocks in the NASDAQ carrying the index higher during this period.

However, according to hedge fund trading platform Kensho, over the last 20 years the NASDAQ has had five other streaks of at least five consecutive positive days when it outperformed the Dow Jones by 10% or more. During the month after those periods the NASDAQ averaged -0.43% return and the Dow +2.02% return as technology stocks experienced a short-term mean reversion.

Pullback Coming?

These trends should be taken with a grain of salt as the current economic turmoil is unlike any environment we have seen before. However, based on historical data, it appears the technology sector could experience a healthy pullback and mean reversion as we move past the pandemic.

As U.S. states reopen their economies, it is reasonable to expect other sectors of the economy to begin catching up to the technology sector. Many of the tech leaders that have reached new all-time highs during the Covid-19 pandemic have been technology stocks that support the work from home environment. Zoom Communications, for example, provides video and online chat for peer-to-peer use. Prior to the outbreak, the all-time high was $102.20. On June 15, Zoom closed at a new all-time high of $239.02.

Similarly, DocuSign Inc., a company which offers eSignatures, settled at a new all-time high of over $162 on June 15, nearly doubling its pre-pandemic high of $88. Companies like Zoom and DocuSign could be the first to experience the mean-reversion mentioned above as the country transitions back to a new normal of everyday life and less people work from home.

Sector Rotation Will Come. Someday.

The technology sector has dominated the rally from the Covid-19 lows at the end of March because of the environment that Covid-19 has created both socially and economically. As the country and world begin to reopen stores, restaurants, stadiums and other attractions, some non-technology sectors will slowly catch up to the leaders and begin to restore a balance to the major indexes and overall market.

See what experts have to say about tech leading the market. Watch the latest OpenMarkets Roundtable above.

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Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

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