Nasdaq will carry out under the S&P 500 for the primary time since 2016 as buyers avoid expertise shares
For the first time in five years, tech investors are not the life of the Wall Street party.
As of late 2021, the tech-heavy Nasdaq Composite was up 23% over the year, trailing the S&P 500, which was up 28% through Monday. The last two times the S&P 500 outperformed the Nasdaq were in 2016 and 2011.
Tech stocks have four days left to make up this difference, but the final week of the year doesn’t usually bring much news that would trigger an oversized rally. The indices rose across the board on Monday, with the S&P 500 climbing to a record.
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Nasdaq vs. S&P 500 in 2021
The Nasdaq got off to a strong start in 2021 and picked up where it left off in 2020, nearly doubling the S&P 500’s earnings by mid-February. Then trade weakened with the arrival of the first Covid-19 vaccines, raising hopes among investors that the US was on the verge of breaking the pandemic, potentially increasing demand for teleworking technology, home training systems, food delivery apps and technology decreased living room based entertainment.
The inflation rate rose next, topping 4% in April and 6.8% in November. The US Federal Reserve initially expected prices to rise temporarily but halted, spurring the central bank to take a more committed stance, citing expectations for rate hikes in 2022.
That created a double blow for high multiple tech stocks. Investors worry about the demand side of some of their companies, and they also rotate in sectors of the market that tend to do better in an environment of rising interest rates.
“All stocks that stay home, play at home, and work from home were DOA in 2021 as if the pandemic no longer existed,” said Jake Dollarhide, CEO of Longbow Asset Management in Tulsa, Okla. “For the past five years, every time it looked like there was a tech downturn, everyone has bought the slump – 2021 will go down as the year investors didn’t buy the tech downturn.”
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Within the S&P 500, energy was the top performing subgroup of the year, reflecting rising gas prices. Next came real estate, which pays high dividends and has benefited from increasing demand for warehouse space and residential real estate.
Tech isn’t too far behind, largely because mega-cap companies Apple and Microsoft have held up well, making up a large chunk of the tech subgroup and the entire S&P 500. Alphabet and Meta-Platforms (formerly Facebook) are part of the Communication Services sub-index and Amazon belongs to the group of cyclical consumer goods. Both have slightly outperformed the broader index.
The main problem for the Nasdaq has been the falling value of companies that hit huge market caps in 2020 only to see investors turn against them this year.
Zoom stock is down 45% this year, after a 326% increase in sales last year resulted in its stock price quintupling. Peloton, meanwhile, is down 76% after sales growth peaked at 232% in mid-2020, sending the stock up over 430% for the year.
Twilio, Spotify, and Block (formerly Square) are each down more than 20% this year, and PayPal 18%. The WisdomTree Cloud Computing ETF, a basket of publicly traded cloud software companies, is roughly unchanged for the year after more than doubling in 2020.
“I’ve advised clients that if you’re a heavy tech company, you are likely to lag behind the overall market,” said Dollarhide. “But think about how much you have outperformed the market over the past three to four years.”
In 2020, the Nasdaq rose 44% while the S&P 500 rose only 16%. From late 2016 to late 2020, the Nasdaq gained every year, rising 139% overall, compared to 68% for the S&P 500.
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Nasdaq vs. S&P 500 2017-2020
Dollarhide said he took advantage of the recent pullback to buy stocks of some companies he believes are well positioned for the future, even if they have fallen out of favor recently. DocuSign, for example, is down 30% this year after more than tripling in 2020. Dollarhide said that because of its relationship with Charles Schwab, his company is constantly using DocuSign because Schwab “eliminated faxes and paper forms and this is the only way you can open a new account these days.”
“I use DocuSign five, six, seven times a day while faxing or mailing five, six, seven times a day,” he said.
Another purchase he made was Zillow, which has plummeted over 50% this year, largely due to the company’s failed efforts to crack the home flipping market. The company left the business in November after posting a loss of over $ 328 million in the most recent quarter.
“Zillow is just a classic misstep,” said Dollarhide. “Getting into houses and turning them around is a terrible idea. We bought on this decline. It’s an overreaction on the downside. Honestly, you’ve lost each other. ”There are individual buying opportunities for investors like Dollarhide, DocuSign, Zillow, and even Zoom.
Of course, the difference in performance between the two indices is no longer as remarkable as it used to be, as the Nasdaq and the S&P 500 are becoming more and more similar.
The seven companies with the highest weightings in the S&P 500 – Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia – now make up around 27% of the index. They are also the bulkiest members of the Nasdaq, which is the main reason the growth of the two indices is only a few percentage points apart this year.
“The market is increasingly becoming FAANG,” said Tom Lee, managing partner at Fundstrat Global Advisors, referring to Facebook, Apple, Amazon, Netflix and Google.
Lee, speaking on CNBC’s “Mid-Term Review” Monday, said he sees FAANG as more than just these companies and includes other technology leaders with great market share and pricing power. Though concerned about the impact of inflation and interest rates on the overall market, Lee said FAANG stocks would be his second favorite choice after energy through 2022.
“When there is panic about inflation and the tightening of the Fed, the rest of the market takes it pretty hard,” Lee said. “I think FAANG is pretty solid in the first half and everything else looks really shaky.”
CLOCK: Because of this, Fundstrat’s Tom Lee sees a withdrawal in 2022