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Timeout for Tech Stocks

By Jim Pearce on June 16, 2017

Technology stocks have gotten off to a great start in 2017, powered by the promise of economic growth in a business-friendly environment. And it isn’t just the trendy “FANG” stocks consisting of Facebook (NSDQ: FB), Amazon (NSDQ: AMZN), Netflix (NSDQ: NFLX), and Alphabet’s (NSDQ: GOOLG) Google that have enjoyed big moves this year.

The NASDAQ Composite index, consisting mostly of information technology companies, shot up 16% by June 8. But the index dropped 2% the following week, perhaps signaling that investors are getting nervous about historically high stock valuations.

There is nothing unusual about a group of stocks taking a rest after a quick run up the charts, especially given this year’s breathtaking gains in Apple (NSDQ: AAPL) at 34%; NVIDIA (NSDQ: NVDA) at 57%; and Tesla (NSDQ: TSLA) at 71%, all at the NASDAQ’s peak value.

But it does beg the question: where did that money go and when is it coming back? The S&P 500 index was flat at the same time the NASDAQ was dropping, suggesting that money did not exit the stock market altogether but went into other sectors instead.

An early warning sign of an impending correction is the sudden movement of investor capital from hot growth stocks into less pricey value stocks. That’s good news in that it doesn’t reflect a loss of confidence in the entire stock market, which is a necessary ingredient for a crash to occur. But it’s bad news for those companies that have enjoyed the biggest gains and are at greater risk of leading the market downward when it drops.

Corrections are a normal (and frequent) occurrence that have little impact on long-term performance, unless you own too much of the wrong type of stocks. That’s because some stocks will drop more than the market average during the next correction, making it more difficult to recoup those losses during the ensuing recovery phase.

We are keeping a close eye on the tech sector to see if that money returns, in which case this bull market may have further to run. But if tech stocks continue to slide, then certain international stocks may offer protection from a possible correction in the U.S. market.

Lost in the recent rancor over political squabbling both here and abroad is the single most significant macroeconomic trend for the at least the next twenty years, and perhaps the remainder of this century: the nearly ten-fold expansion of middle-class consumers predicted for China and India over the next fifteen years.

That will not have much impact on the next set of quarterly earnings reports, but it will dictate the flow of capital over the next decade as companies that acquire market share in those countries grow revenue and earnings far above the global averages.

Just as many American companies enjoyed massive growth in the decades following World War 2 as the baby-boomer generation created a temporary surge in productivity and consumption, the next swing of the macroeconomic pendulum will favor businesses selling into the huge store of pent-up demand for cars, houses, and everything else people with discretionary income like to buy overseas.

Among those beneficiaries will be tech stocks, such as Apple that have already staked out turf in Asia. But other big winners will be seemingly mundane businesses such as India-based automobile manufacturer Tata Motors (TTM), which recently partnered with Microsoft (MSFT) to add smart-car technology to its product menu.

Battles are being fought every day in the stock market, but don’t let that distract you from where the war will ultimately be won.


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