You might be a techie if...
- Friday, October 29, 1999
Reprinted with permission from World Finance Net IPO Newsletter, written by Alexander Frauenfeld.
Whether you like them or not, you should be cheering for technology stocks. That is especially true if you are invested in the US stock market. Even if you do not own a single share of a technology company (tech), because you believe such stocks are considerably overpriced, pray for them anyway. Why? Because your financial future depends on what will happen to the Tech Sector.
In fact, almost all of us are tech investors now. At the end of the third quarter, the 65 tech stocks in the S&P 500 index accounted for approximately 25% of its market capitalization. That number stood at 19% just last December and a puny 7% in the early 1990s. What that means is if you are one of the millions of investors who have invested $750 billion in S&P index funds, directly or through a mutual fund or retirement plan (401(k) or IRA), one out of every four of your dollars is invested in tech stocks.
Thats not necessarily a bad thing. Tech stocks surged from 21% to 25% of the S&P 500 because they made gains of 4.4% last quarter, whereas all other sectors lost ground. If not for tech stocks, the S&P 500 would be down much further than it is already (see Fall of the S&P 500). With the help of techs, the last quarterly loss was only 6.6%, with the year-to-date at a positive 5.3%. Without the techs, the index would be down 9% for the third quarter alone and minus 1% for the year-to-date.
Anti-tech investors might think they are safe if they are not invested in the S&P 500. Not so fast. The Tech bulge is not just an S&P phenomenon. The Russell 1000, a much broader index, is also 21.5% tech. And the same is true for just about any other diversified US index or fund that is having a positive impact these days.
In fact, indices and funds that do not have a large enough share of tech stocks face losing out. If the benchmark is based on a 25% market cap of tech stocks, and your fund is underweighted in (doesn't have enough of) the techs, it will take tremendous luck or skill to still keep up with the markets, let alone beat them.
There is of course a downside to the markets dependence on tech tocks. They are much more volatile, interest rate sensitive in the case of Internet issues, and are mostly responsible for the major market swings that make it so nerve-wrecking for investors. Additionally, while techs account for approximately 25% of the S&P 500 market cap, they only contribute 12.6% of operating earnings, mostly due to Internet financial statements splashed in red ink. If one big tech player disappoints when earnings announcements come out, the bad news spreads like a bush fire, burning the entire tech market. A good example is the recent earnings shortfall of Intel, which, at a few cents shy of expectations, dragged the entire S&P 500 down 2.1%.
Die hard anti-tech investors can take solace in the fact that any one sector cannot maintain its dominance forever. Energy, for example, peaked at 30% of the S%P 500 in 1980, and is now a measly 6.3%. Consumer staples jumped to over 20% in the early 1990s. Now they only make up 10% of the index. Still, there is a very strong case for an outlook in which techs rule for many years to come. There is a powerful macroeconomic trend observable, from which techs will profit: the substitution of capital for labor. This is driven by the falling costs of technology and increasing labor costs.
So even if an overweighting of tech stocks may give you pause, for the foreseeable future it is vital for continued success. Welcome to the techie club.
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