The Best Investment to Own When the Market Tops
Pretend for a moment that I could tell you precisely when this market was going to top…
What would you rather do — sell all your stock holdings and pivot to cash or stay in stocks?
Of course, the obvious choice here would be to dump stocks at the peak and watch the market fall out beneath you…
But it’s the wrong choice.
We’ve been enjoying the tailwinds of a rampaging bull market in technology stocks for a while now. As I write, valuations on Big Tech names have gotten so frothy that many investors are comparing 2021’s surge in stocks to the dot-com bubble.
So let’s look at what happened when that bubble burst…
The NASDAQ-100 peaked back in March 2000, handing investors an awful 62% negative total return over the next six years. Clearly, cash was a better alternative. But what many investors don’t remember is the fact that some pockets of the stock market actually did incredibly well in the wake of the dot-com bubble popping!
Take utilities, for example.
The Dow Jones Utility Average actually rallied more than 72% higher during that six-year stretch, posting positive returns during the absolute worst of the selling.
That’s a heck of a lot better than sitting on cash — utilities even outperformed bonds during that flight to safety.
And I think this market looks similarly positioned right now.
There’s a false narrative going around right now that “the stock market” is a single entity. Market analysts go on CNBC shouting that “stocks are overvalued” — as in all stocks.
But that’s not the case. In fact, the cheapest decile of stocks is actually cheaper relative to the rest of the market than it’s been anytime since 1975.
So some stocks are super-expensive right now.
But some cheap stocks are really cheap.
(In fact, the last time this group’s valuation dropped this low, it paid investors 23% annualized returns for the next five years!)
And that bodes well for tech investors.
Just like when the tech bubble burst, the evidence suggests that ignored names in this frothy bull market will perform much better than a move to cash when the next top comes.
And as I’ve shared in these pages over the last few months, many of the most ignored names in this market are actually small-cap tech stocks that aren’t part of big indexes like the S&P 500.
For now, it’s still too early to shift over to underappreciated tech small caps. With the Fed’s foot planted firmly on the gas, I suspect that big names still have further to move. I’ll let you know when that changes in my view.
Until then, now’s the time to rethink your plan for the next big market sell-off. Cash won’t be the best way to play the rotation out of Big Tech.
Most investors don’t realize it, but the best thing to own for the next market top is probably more stocks.
Jonas Elmerraji, CMT