The Nasdaq
Tech stocks
In most of my posts, I’ve talked about stocks by using the S&P 500. That’s because it represents a large basket of stocks and is a really good proxy for the overall stock market. It’s also a much larger basket of stocks than the Dow, so it just makes sense to use it to get that broader coverage.
There is another stock index though and it’s also a good proxy for the market but with an added emphasis on technology. It’s, of course, the Nasdaq:
The Nasdaq is probably most famous for the tech bubble, when a bunch of dot-com companies got crazy valuations despite having no path to profitability. In fact, it was actually even worse than that. It wasn’t just not being profitable, it was losing money in the most tech way possible - at scale.
Now, there is a new tech rally. In case you haven’t noticed, it’s been going on for at least seven to eight years in earnest but could be traced back even further.
It’s being driven by some companies that have been around for a long time like Apple and Microsoft. Companies that have been around for a decent amount of time like Google and Amazon. And, some new companies like Facebook and Netflix.
Often, this current tech rally is referred to as a bubble. It’s easy to think that given the tech bubble we just had twenty years ago. History repeats right?
I don’t want to say “this time is different” but the big difference between now and then is that tech companies make an absolutely insane amount of money now. We aren’t talking about pets.com here. We are talking monopolistic tech titans of our generation.
I won’t say that the amount of weight held by all these tech companies isn’t without fault. It may not be as extreme as a bubble but it certainly presents a risk. Markets are strongest when gains are broad and right now they are very narrow. This is concentration risk.
That concentration risk has only gotten worse in the last few months. That’s because, as of today, the Nasdaq is break-even on the year. And, if you haven’t noticed, the Dow and S&P 500 are not.
Eventually, this trend will reverse. But don’t bet on that in the short term. Because, let’s just say being quarantined is a whole lot easier with technology.