Tech Stocks Are the Talk of Wall Street

Either technology is taking over the economy, or the market is sending some warning signs about technology stocks.

I wrote earlier this year about how technology’s share of the S&P 500 has been climbing the last few years because returns in technology stocks are much higher than the rest of the index’s sectors. Recently, the outperformance of tech stocks has been relentless and again increased the sector’s share of the index.

The tech sector has returned about 13% so far in 2018. No other sector is close. The closest is consumer discretionary, which is up 10% for the year. Consumer discretionary is dominated by two stocks that most people consider to be technology companies: Amazon and Netflix.

Tech stocks tumbled after peaking in January. They launched a recovery from late February through early April, and then corrected again. But they surged again beginning in late May and reached new record highs for the sector.

Fewer than 18 months ago, at the start of 2017, technology was a little under 21% of the S&P 500. That was a hefty weighting and well above the long-term average of just above 15%. But after the latest rally, tech now is more than 26% of the index. The only time it has been higher was during the tech stock bubble of 1999-2000.

The rally in tech is fairly broad-based. You hear a lot about the FAANG stocks (Facebook, Apple, Amazon, Netflix and Alphabet/Google). The performance of these five companies continues to be so strong that together they make up 5% of the global market capitalization, according to Bespoke Investments. But there also has been strong performance in the semiconductors and software & services subsectors. Not only are these subsectors delivering strong performance, but a large number of stocks in them have high returns. A lot more than five stocks are carrying these subsectors higher.

Technology clearly has been carrying the return for the entire index in 2018 and a lot of the return for the index in 2017.

Last week, there was a very brief correction in technology that some analysts said was the beginning of a correction in tech and a rotation into other sectors. The Nasdaq was negative, while the Dow had positive returns. But now it appears that was simply investors rebalancing their portfolios and taking some of their tech gains. Tech stocks are back to pacing the market indexes.

Technology stocks appear to be stretched by a variety of measures, both technical and fundamental. But that’s been the case for a while, and tech stocks continued to rise. None of the measures has a history of pointing to short-term turns in the market.

No doubt someday technology stocks will face a correction and perhaps a bear market. But there’s no reliable way to call the turn in advance. For now, investors should realize the extended nature of the tech stock rally. Index fund investors, in particular, need to realize how much of their portfolios are dedicated to technology companies.

Long-term investors need to be sure their portfolios are balanced and diversified. That means taking some profits periodically in sectors that outpace the rest of their portfolios. Investors who want to avoid a sharp correction or bear market need to decide in advance what will make them change their allocations and be prepared to act when those events occur. One rule that usually works is to sell an investment (or in this case a sector) when its current price falls below its 300-day moving average.

The Data

This was a light week for economic data.

Retail sales increased a sharp 0.8%, and last month’s increased was revised higher to 0.4% from 0.3%. Excluding autos and gas, sales still increased 0.8% for the month. Most retail categories showed strong increases. The interesting part of the report was that department stores had their second consecutive month of strong sales increases, while non-store retailers (websites) increased sales only 0.1% for the month.

The Consumer Price Index (CPI) came in at expectations with a 0.2% increase for the month. After excluding food and energy, it still rose only 0.2%. The CPI increased 2.8% over 12 months and 2.2% after excluding food and energy. The 12-month numbers made some headlines, because they were above the 2% target and the highest levels in some time. But I’ll explain in an upcoming Bob’s Journal why we’re not at risk of inflation taking off.

Producer prices also were higher. They were up 0.5% for the month and 3.1% over 12 months. After subtracting food and energy, they were up 0.3% for the month and 2.4% for 12 months. Most of the increases were in metals and trade services.

Small business owners are regaining high levels of optimism. The Small Business Optimism Index from NFIB rose to 107.8 from 104.8. That’s the second-highest level in 45 years, and the highest level of this recovery. Most components of the index were higher. As they have in the past, business owners pointed to higher prices and wages in the future, but those expectations haven’t been realized so far.

New unemployment claims declined another 4,000 for the week. The four-week average of continuing claims is at the lowest level since December 1973, and other measures are near historic lows.

The Markets

The S&P 500 gained 0.23% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 0.26%. The Russell 2000 lost 0.04%. The All-Country World Index fell 0.26%. Emerging market equities tumbled 2.63%.

Long-term treasuries rose 0.45% for the week. Investment-grade bonds fell 0.02%. Treasury Inflation-Protected Securities (TIPS) dropped 0.01%, while high-yield bonds returned 0.28%.

On the currency front, the dollar fell 0.04%.

Energy-based commodities returned 1.15% for the week. Broader-based commodities rose 0.12%, with gold gaining 0.24%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. The June online seminar is my semiannual detailed economic and investment outlook titled “The Challenging Phase For Investors Begins.” You can watch these seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

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I’m now a regular contributor to the Forbes.com blog. You can view my contributor page here.

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