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June 28, 2018

A Bitter Lesson for Investors as Trade War Targets Tech



President Trump has put technology in the trade war crosshairs.

New protectionist measures from the White House aimed specifically at technology companies pummeled Wall Street on Monday, with tech stocks leading losses.

The Dow Jones Industrial Average closed below its 200-day moving average, an omen of further declines ahead. The Dow hasn’t closed below its long-term trend line since mid-2016. At its session low, the Dow was down 496 points.

The tech-heavy Nasdaq endured its worst one-day decline in 11 weeks. The CBOE Volatility Index (VIX), or “fear gauge,” spiked by 28.83%.

News broke Monday that Trump is preparing measures to curb China’s ability to invest in the U.S. tech sector.

The president will invoke national security to impede the ability of China-owed or China-backed firms to invest in firms that are linked to “industrially significant” U.S. technology. The administration is drafting “enhanced” export controls with the goal of preventing China from purloining American technology.

The news sent tech stocks skidding today. The sector had been relatively resilient to trade anxieties, with other sectors such as industrials bearing the brunt. But tech companies with major overseas exposure are belatedly realizing that protectionism will hurt them as well.

Two of the largest technology exchange-traded funds, the Technology Select Sector SPDR ETF (XLK) and the iShares U.S. Technology ETF (IYW), fell 2.08% and 2.15%, respectively.

Bull runs often are propelled by a relatively small number of strong stocks that are market leaders. Since 2015, the broader market has owed much of its ascendancy to the five FAANG stocks: Facebook (NSDQ: FB), Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), Netflix (NSDQ: NFLX), and Alphabet’s (NSDQ: GOOG) Google (see chart, compiled with data from Thomson Reuters):

All five FAANG stocks fell hard. When market leaders tumble, the rest of the troops typically follow.


Market dominance by a tiny minority of stocks isn’t a new phenomenon.

Between 1926 and 2016, only five stocks — Apple, Exxon Mobil (NYSE: XOM), Microsoft (NSDQ: MSFT), General Electric (NYSE: GE) and International Business Machines (NYSE: IBM) — generated a tenth of all shareholder wealth, according to data from Arizona State University.

As tempting as it might be, piling into only a handful of market leaders is a mistake. The fate of the “Nifty Fifty” is instructive.

When I was a kid growing up during the go-go 1960s, prosperity seemed boundless. Emblematic of the era’s economic exuberance were the Nifty Fifty.

The Nifty Fifty comprised a group of buy-and-hold stocks that were popular among individual and institutional investors. I remember hearing my father tout the virtues of these stocks; he called them “one decision” investments. His portfolio was heavily weighted toward them.

These brand name blue chips, such as GE, Xerox (NYSE: XRX), Johnson & Johnson (NYSE: JNJ), and Coca-Cola (NYSE: XO), were considered iron-clad staples suitable for any investor. Then came the 1973-1974 market crash and subsequent bear market.

The Nifty Fifty got crushed the worst. By 1974, my dad was cursing the stocks he once praised. The lesson stuck with me: it’s easy to fall from grace.

Reversal of fortune…

Technological disruption and societal change ensure that no company is safe from getting toppled. Consider erstwhile Nifty Fifty denizen General Electric.

In 1896, GE was one of the original 12 companies listed on the newly formed Dow Jones Industrial Average. By 2000, GE was the most valuable company in America.

However, over the past 12 months, GE shares have lost half their value as the industrial colossus undergoes a painful restructuring.

For years, GE generated outsized investor wealth by occupying the vanguard of innovation. But it evolved into an unwieldy conglomerate.

Adding insult to injury, GE last week was booted from the Dow and replaced by drug retail chain Walgreens Boots Alliance (NSDQ: WBA).

Your takeaway: “buy-and-hold-forever” is no longer a suitable investment strategy. Your best defense is diversification and continual re-calibration. Academic studies show that most investors fail to properly diversify. Diversification mitigates the impact of market gyrations on your portfolio by balancing your performers and under-performers.

You should diversify among asset classes, sectors and geographic regions. Diversifying among asset classes is more beneficial than merely owning several stocks.

Now’s a good time to trim allocations in large-cap growth stocks. The crashes of 1929, 1973, 1981, 1987, and 2008 are all examples of situations when investing in only growth stocks with the highest potential returns was unwise.

During the steep declines in February and March of this year, overvalued large-cap growth stocks got hit the hardest.

This bull market may still have some gas left, but remain leery of overbought “story stocks.” Indeed, they got clobbered today. Financial television hypes glamorous stocks, such as FAANG, to boost ratings. But Wall Street is littered with fallen angels.

No company is unassailable. It seems that every new generation of investors must learn this bitter lesson the hard way.

Courtesy of John Persinos, Investing Daily (More from Investing Daily Here


The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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