Tech stocks are taking a blow and it is raising questions about the role they can play moving forward.
The inflow of money into big tech hardly needs mentioning, I’m sure. The thing is, they hardly needed more of a boost.
The top five U.S. companies — pull out Netflix, put in Microsoft — made up 18% of the market capitalization of the entire S&P 500. That had never happened before for any top five companies at any time in the index’s entire history.
Look at the NASDAQ 100 index and it gets even more bonkers. Six tech stocks made up half of the entire index by market capitalization. Looking at the index-wide price-to-earnings ratio, we hadn’t seen valuations so high since 2004.
Of course, the internet and the business that comes from it have changed a lot since then.
So what does the sell-off mean, and how will it affect what we’re seeing as the biggest gold bull run of our lives so far?
First off, I don’t expect this sell-off to become a deep rout. Yes, investors drove valuations to extremes. Yes, this created some bad market distortions, especially for more complicated and risky positions like shorts.
However, these are — at least for the big-name companies — profitable businesses. There is plenty of revenue and we all certainly know they are well entrenched with deep and wide moats that will keep any plucky startups from chiseling away at market share. If anyone tries they’ll just buy them up with the equivalent of loose change in their couches.
Revenue growth has been slowing for big tech for a while now, though. They aren’t growth plays like they used to be. They have to create value for shareholders and adding more monthly average users or another similarly dubious metric isn’t going to fly anymore.
Clearly, the sector needs some pragmatism and Mr. Market decided to change his outlook almost overnight.
The sell-off raises some big questions, though. Where are all those tech bucks going to go now? Tech may not collapse but clearly valuations have hit an upper cap. Where do investors look?
While the tech sector sold off, the rest of the market wasn’t doing much better. All 11 sectors of the S&P 500 started today by going into negative territory.
Tech, especially big tech, was the one place your average stock investor could look to see results. They were also, as mentioned above, propping up the rest of the indices with their out-sized market capitalization-weighted representation in the indices.
So where else do we look? Traditional value stocks are still a giant question mark. Even the most consistent dividend stocks will be hard-pressed to avoid cuts to their disbursements (looking at you Exxon).
Two of just a handful of sectors that are in positive territory over the last year — Consumer Staples and Consumer Discretionary — are looking solid but we can’t expect any extra notable revenue or profit growth from this mess we’re in at this point several months in. Plus something like 30 million people just saw their effective income slashed by at least half without expanded unemployment benefits.
There is going to be a spillover in money drifting from tech stocks and there is really no good place to put it if you just look at broad swaths of the stock market.
Investors will have to dig deeper to find value and potential, and it won’t be easy.
A strong contender that comes up once you get past the full sector viewpoint is normally buried deep in commodity sector listings — gold.
Commodities are a strange grab bag. Why are precious metals lumped in with iron ore and oil? Why are all of them lumped in with soybeans?
That’s why the major tracking tools like the GCSI Index are posting horrendous performance over the last year, and really for many years prior. Heavy weighting towards energy will do that.
Dig through the individual components and you see standout listings — gold, silver, rhodium is WAY up, and so is lumber.
And this is what investors will ultimately have to do to find a replacement for big tech in their portfolios. We’re back to picking niche markets and picking the winners from within them, be it tech still, or any of the other major sectors, or commodities.
So what does the tech sell-off mean for gold?
With the fantastic run-up we’ve seen in gold stocks over the past year or so, especially in the last several months, we’re going to see even more retail and institutional investors looking at gold-stock returns and buying in.
With how small gold stocks are compared to tech — or any other sector, really — it will only take a relatively tiny fraction of outflows from elsewhere to significantly push gold-miner stocks higher. This is doubly true for the best companies out there that are still flying just under most investors’ radars.
I know a lot of people don’t care about gold. I’m pretty agnostic about it. However, I’m not agnostic about stock performance and building wealth. That is exactly what we’re doing with gold right now, and there is plenty of room for this gold bull market to run.
