Merryn Somerset Webb
There’s a sad story in The Times this week of the fate of the sailors on the Dutch East India Company ship, Rooswijk. It sank off the coast of Kent in 1740, and its recent excavation has uncovered a haul of rather lovely silver coins. The not-so-lovely bit is that the coins were sewn into the clothes of many of the 237 sailors who went down with the ship – something that wouldn’t exactly have helped them save themselves from their watery graves.
I thought of this again when the Nasdaq hit yet another record high on Tuesday as Alphabet (owner of Google) beat earnings forecasts again. Apple, Amazon and Alphabet are now the three most valuable stocks listed in the US. You can argue that they should be: Google’s advertising revenues are up 24%, and the company is making so much money that even after the stunning $5.1bn charge to cover last week’s fine from the European Union for anti-competitive behaviour, it has still cleared $3.2bn in profit. Not bad going.
But we should still, I think, approach the tech sector with some caution. The last great tech boom (1999) wasn’t the same as this one (more actual profits this time), but the main lesson learnt from it – that a market led for too long by just one sector is a dangerous market – is as valid now as it was then. Remember how in 2000 everyone suddenly dumped what fund manager Premier’s Simon Evan-Cook calls their “overpriced tech fantasies” and started buying “unassuming, reasonably valued stocks” instead? That will happen again.
When? On the face of it, the flattening of the yield curve alongside ongoing quantitative tightening (QT) in the US suggest it will be soon. As MacroStrategy’s James Ferguson notes, QT has created a clear pattern in the S&P 500: every month since February it has done well, then from mid-month onwards (when the Fed sells bonds or allows them to mature so as to shrink its balance sheet – that’s QT) the gains have been “repeatedly reined in”.
There are counter forces that could easily delay any market correction (again). US elections are coming up (Trump won’t want to see the market fall ahead of those, and is already agitating against Fed tightening), while lower growth and trade tensions might soon push China back from tightening to easing again. Both of these factors could put one final bit of nitroglycerine under the momentum part of the market.
Yet that should, perhaps, be seen not as a chance to buy more big tech, but to adjust your portfolio away from it. This doesn’t mean going too mad for cash (the rise in public-sector salaries this week should be a reminder that inflation is far from dead). But it does mean diversifying into value where you can. Think of value as the lifeboat that will stop your FANGs from sinking you and your portfolio to the bottom of the sea.