September Tech Tumble Creates Massive Opportunity
All year long, we’ve been telling you that tech stocks are the best path to gain in 2020.
(And that’s been a pretty good bet so far…)
But we haven’t spent a lot of time getting into why.
The answer might surprise you: It’s largely because tech stocks are bigger than other stocks.
I realize that sounds strange – why should big stocks go up more than the rest of the market? But that’s exactly what’s happened this year. Have a look:
The chart above shows the biggest stocks in the S&P 500. Each stock’s performance so far this year is plotted against its weight in the S&P 500 Index. If you focus on stocks that make up 1% of the S&P or more, the relationship is crystal clear – it’s a straight line.
The reason behind this odd relationship has to do with passive investing.
Unlike active investors, who try to pick stocks that are likely to beat the averages, passive investors simply track an index like the S&P 500 or the Dow Jones Industrial Average.
As of March 2020, so-called passive funds make up about 48% of all investments. In other words, half of all investors are betting that they can’t beat the market! It’s the highest that number has ever been – and it’s trending higher, driven by 401(k) plans and robo-advisors.
One side effect of passive investing is that a bigger share of each investment dollar goes to bigger stocks.
That’s at least part of why the returns of the largest stocks in the market in 2020 are perfectly correlated with their representation in the index.
There are a couple of important takeaways for investors – both passive and active – right now:
First, the passive push higher bodes well for you!
I know lots of investors are nervous about the recent correction stocks experienced at the start of this month, but the dominance of passive investments this year suggests that it’s more likely to be a buying opportunity than the first sign of trouble.
While the passive trend isn’t new, it’s being exacerbated right now by aggressive asset inflation from the Fed. That’s why big stocks have surged so much in 2020. And the Fed isn’t showing any signs of taking their foot off the gas.
September’s tech sector tumble is likely to be a buying opportunity, at least in the near term…
Second, it means incredible opportunities in smaller tech stocks – especially the ones that aren’t included in passive indexes.
More investors on “autopilot” necessarily means fewer eyes on what’s going on in smaller companies, where old-fashioned boots-on-the-ground research is the only way to value what a stock is worth.
That means we may see a trend toward bigger upside between the time a company debuts on the public markets and the time a company reaches the scale needed to make it into the big stock indexes.
Wall Street is fixating on huge stocks right now. And they’re probably going to leave a lot of money on the table as a result.
Simply put, the data suggest it’s an exciting time to be an investor. And there could be a lot more to 2020’s rally than most folks realize.
Jonas Elmerraji, CMT
P.S. While we’re on the subject, my friend Ray Blanco has been researching a major catalyst in a small battery tech company that creates exactly the kind of under-the-radar opportunity that the current passive-dominated market environment enables.
You won’t want to miss this…
Keep an eye out at 4:30pm today for more information.
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