We often speak of the importance of the technology sector in our economic expansion since the last recession. We still believe that we are in the early innings of a technology revolution that will change so many things. There is conversation about robots, driverless cars, flights to space, artificial intelligence, and so many other innovations now, that they have become common and believable. We all remember watching the Jetsons cartoon and thinking how the technology looked interesting, but we never imagined it would be possible, so soon. For the economy to keep expanding we must have this sector lead, which is why we are strong believers in this sector. Of course, the technology sector is also the largest portion of the S&P 500.
If we look at the 10-year chart below, there is a comparison between the technology sector and the S&P 500. We can clearly see that the sell-off during the dotcom bubble was valid as many of those companies had paper wealth with no real sales and revenue. This second round of technological change has significant innovation, and actual solid growth and revenue. The largest tech companies are now the most valuable companies (Microsoft, Apple, Amazon, Google and Facebook). This path will continue forward. As the chart shows, the latest push in technology is surging the market higher, but also pushing our economic expansion further. Its not just tech stocks, but all companies in many industries must keep adapting to new technology or they will be left behind. Sure, you can have companies limit their tech expansion, in difficult periods, but technology is not going away. And especially with a large group of millennials that are changing the way they shop (Amazon), eat, communicate, and how they live. We have seen the brick-and-mortar space decimated as thousands of stores close annually. The mall is now being re-envisioned as a different space, whether its for educating children or other new ideas, but not so much for shopping. Amazon will continue to disrupt.
Of course, recently we are hearing of the U.S. government looking to regulate or monitor these large powerful tech companies, but let’s say in the worst-case scenario that some of them were forced to break up, it would create even more shareholder value. The parts of these companies are growth and profit machines. But in the end, let’s face it, do we really want to restrict the growth of our strongest companies, as China is seeking to be a global leader in technology, and especially in 5G growth, by 2025. Part of the trade discussions is technology, whether its Huawei leadership in 5G, or the theft of our technology by China. We expect these to be key points that could unravel the trade discussions.
Technology sector vs. S&P 500 (10-year chart)
Source: KOYFIN & AETOLIA CAPITAL (as of 9/6/19)
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Chief Investment Officer
AETOLIA CAPITAL LLC
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