Navigating Recent Tech Market Turbulence: Key Observations and Insights

At Members’ Wealth, as we continue to analyze the market this summer, the relative imbalances between large tech stocks and the rest of the market have continued to astonish. Some charts this week (below) offer valuable insights and a reminder that market extremes can persist longer than expected, but when they reverse, the shift can be abrupt and impactful.

I lived through the 1999 tech bubble and its subsequent aftermath, which left a lasting impression. I distinctly remember, in the aftermath and for years afterward, looking back at the peak of the hysteria of 1999 and thinking, “How could so many have missed this, and why was it not so obvious at the time?” The truth is, market imbalances can be obvious, but being obvious does not make for easy trading. While timing these shifts is challenging, it’s crucial for investors to remain vigilant. I vowed 20+ years ago to always be on the lookout for the “obvious” hysteria.

So here we are. These charts will show extremes, though not necessarily hysteria, and while it may seem obvious, it again does not make for easy trading.

Key Learnings from This Week’s Charts:

1. Valuation Extremes Pose Risks
   • The concern we see for big tech is the potential unwinding of extreme valuations. The current shape of the market shows similarities to the dot-com bubble. The chart below shows price movements of US Tech Media Telecommunications (TMT) stocks versus the rest of the market, excluding TMT stocks. One chart on price alone does not tell the whole story, nor call a top, and many other factors are at play. What remains consistent is that such extremes do not last indefinitely and often unwind more rapidly and thoroughly than anticipated.

1. Tech Stocks Face Challenges
   • Last week, tech stocks faced some challenges. The Nasdaq 100 was down for the week; however, the underlying trend remains upward for now. We are mindful of the real risk of a deeper correction given the extreme starting point. This week, we are watching more big tech earnings reports. Lately, more companies have been missing revenue expectations, causing us to be mindful of the potential impact on future stock price performance.
2. Investor Sentiment and Market Dynamics
   • Perhaps because it is midsummer, despite the recent selloff, it does not seem that investor sentiment has changed altogether that much. Complacency can be a warning sign, but it can also mean investors are not in a selling mood, leaving a tug-of-war between the pull of higher prices and the tug of gravity and reversion to the mean. But if money leaves tech, where might it go? Just about anywhere else. The chart below focuses on the S&P 500, which is market cap-weighted, with big companies like Apple, Nvidia, Amazon, Microsoft, and the rest of big tech having the most influence. In contrast, the S&P 500 equal weight index weights all 500 stocks equally, giving the index a relatively smaller market cap and less tech stock concentration. This chart suggests that the downside risks for tech stocks are credible but that there is also potential upside for non-tech sectors.

Conclusion:

The current market dynamics suggest investors should be wary of large-cap tech stock dominance forever. A rotation away from tech is possible, and we have seen some signs of this in the last few weeks.

From Extremes: Historical Echoes

It’s crucial to remember that market extremes, similar to the dot-com bubble, often unwind faster than expected but timing the top always poses a challenge. With current valuations, investors must stay alert to the potential for rapid market shift. With timing so challenging, investors should prepare with disciplined portfolio management, rebalancing, diversification, and perhaps some intestinal fortitude to stick with those high-quality tech investments that might have some volatility ahead.

As always, staying informed and proactive is essential in navigating these market conditions.

The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns or results. No representation is made as to the accuracy, completeness or timeliness of the information in this material since certain information herein is based on or derived from information provided by independent third-party sources. There is no duty to update this information. Illustrations provided are for presentation purposes only. Actual investment experience will vary with stock selection and changing market conditions. Investment advisory services offered through Member's Wealth, LLC, a registered investment advisor. The Dow Jones Industrial Average (DJIA) is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. The National Association of Securities Dealers Automated Quotations (NASDAQ) is an American stock market that handles electronic securities trading around the world. The Russell 2000 index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. Visit www.russell.com/indexes/ for more information regarding Russell indices. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Bloomberg US Aggregate Bond Index, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

About the Author – Dane Czaplicki, CFA®

Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.

Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.

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