After a rough April and despite the tough close to end the month, tech stocks came clawing back and left industrials, small caps, and many other stocks in the dust during May. Non-tech stocks made their attempts but ultimately failed to recapture their former highs from March. And yet just few weeks ago Dow bulls were taking a victory lap as the index crossed the 40,000 mark for the first time in history. Since then, we have seen the Dow fall about 4.25%. The same can be said for other indices like the Russell 2000 (down 3.5%) and midcap index (down 3.25%). This is a normal fluctuation seen during a bull market, but we know market technicians will be keeping a keen eye on those March levels. Tech-heavy indices like the Nasdaq and S&P 500 are showing strength while industrials are failing to break above their former highs. For some industries, like energy, those former highs go all the way back to 2014, and a break above those levels could lead to pretty significant outperformance. But over the last few weeks, investors returned to favoring what has worked for them over the last decade, and that’s tech.
Technology companies have been outperforming essentially since the Great Financial Crisis of 2008. At that time energy made up the majority of the weighting in the S&P 500 but then started to steadily lose favor to computer companies and pharmaceuticals, including biotech. Over time, tech companies of all kinds continued to plod away and take a larger investor allocation percentage at the expense of other industries. However, the run we have seen in semiconductors in particular over the last few years has been anything but plodding. Semis are the backbone of the tech industry, and they are now on the verge of becoming the most dominant sector in the S&P, overtaking software. Nvidia is up more than 1,150% in the last 20 months and now makes up almost 6% of the S&P 500. The only two companies that are larger are Apple and Microsoft.
The strength and resilience we have seen in technology is not only lifting US markets like the Nasdaq and S&P, but also markets abroad. Historically, investors and money managers would allocate funds to emerging markets in order to increase their commodity exposure and potentially capture larger gains while taking on more risk in developing countries. Once a safe bet to beef up your oil and mining portfolio, now you getting about 22% technology in emerging market funds due to the growth of companies like Taiwan Semiconductor, Alibaba, and Samsung. In some regards this is great, but it also means things are getting more correlated. The rising tide of tech is currently lifting all ships, but it’s best to remain diversified. As Warren Buffett has said, when the tide goes out, you get to see who’s been swimming naked.