Volatility in NASDAQ and Tech | Get Ready For A Fight

I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. First off, the team at Oak Harvest appreciates your support and you tuning into our you-tube channel. If you like our content, please refer our channels to your friends and family.

We released our first half 2022 outlook, on December 3rd under the title “Curb your Enthusiasm Yields to a Bull Market Buy”.  It can be found on our website at OakharvestFG.com or in video format on our You-Tube channel. Check it out. We hope you become a subscriber to our content.

Today we are going to talk about Technology stocks, volatility and diversification.

So, I believe it was Mike Tyson who said, “Everyone has a plan, until they get punched in the face”. And viewers, if your financial plan is holding only technology stocks, or your investment portfolio is undiversified, or it is heavily overweighted thematic technology stocks, or SPAC’s, which are Special purpose acquisition companies and were the rage for speculation in 2021, or growth at any price equities trading at valuations based on over 12-15x revenue, or even pre-revenue, I think Josh Brown calls them “hopes and dreams” names, and Jim Cramer calls them “clown companies”, you are probably feeling like you just stepped into the boxing ring with Mike Tyson when he was in his prime boxing years.  You have just endured a series of heavy body blows and knockout head shots.

The month of January has not been kind to your undiversified portfolio.  In fact, the last year has not been overly kind to your holdings as almost every single one of these equity styles peaked on an absolute or relative basis to the sp500 in mid first quarter of 2021.

In analyzing the Technology group and Nasdaq index, I am going to use the QQQ, Nasdaq 100 ETF, as the representation. This is the top 100 largest market cap NASDAQ stocks.  It’s weighted by market cap, so Apple is almost 12%, Microsoft 10% and Amazon 7% of the weighting.  It’s about 25% internet, and 17% both software and semiconductors. Here is a daily chart of the QQQ Etf going back a few years.

As you can see, it is a generally up and to the right chart. So if you were a buy and hold investor, or a dollar cost averaging investor in it, you are pretty happy.  However, if you look more closely at the chart you will see there were periods of almost 6 months, or half a year, when this ETF went nowhere but up and down in a wide range.  Back almost exactly a year ago, in February 2021 this ETF dropped almost -11.25% over 4 weeks, and peak to trough the last 2 months, this ETF is down about -10%.  Recall viewers, this is while the overall S&P500 was down only about -5% during those same two market downturns.

Why do I bring this up, to show viewers over shorter time frames, which I characterize as days, weeks, months and even quarters and a few years, there is no free lunch in the stock markets outside of diversification? While technology stocks have generally grown faster and outperformed the SP500 over the past 10 years, they also, by the nature of high growth, have lent themselves to periods of higher volatility than the overall markets and there have been periods of time measured in months and quarters when they underperformed a broad diversified portfolio of holdings such as the SP500.

Such has been the case year to date, in 2022, and more or less, for over 12 months dating back to early 2021.  Here is a chart of the interest rate yield curve for the last 18 months.  You will see that in the 1st quarter of 2021 the yield curve peaked in its steepness and has been flattening more or less ever since.  This also coincided quite closely with the start of the move up in the “real interest rate” component of US. Treasury bonds. And guess what? Ever since that pivot in the bond market started, the majority of higher valued growth stocks have treaded water at best and at worst, the growth at any price stocks or many no revenue names have declined 50% or more.

While portfolios at OHFG do hold many large cap technology names, by way of single stock ownership or inclusion in some of the funds and ETFs we use as tools to construct portfolios, our investment team constructs broader diversified portfolios that include many other more mundane, less growthy, and in some people’s eyes outright boring companies and sectors that provide a combination of growth and dividend income versus pure capital appreciation potential. Think of beverage companies in consumer staples or snacks and chips, in addition to the more sexy computer semiconductor chip kind of technology stocks selling into cellphones or the metaverse..

As for our thoughts on where large cap technology stocks stand now alongside their volatility.  Here is a chart of the VXN Index which tracks volatility in the Nasdaq.  It’s like the VIX Index calculation for the SP500.  Last week this Index touched the 30 mark and as one can see from the chart over the last 5 years, short of the Covid panic, this index rarely reaches 32.5-35.  However, when it has, it hasn’t stayed there very long.  Historically, a VXN reading at or near 35 has been when the NASDAQ tech indexes were close to their bottoms not their tops, and at those levels it’s paid to be in “buy and mold” behavior in technology names not “raise cash and run” mode.

With the continued high realized volatility that we expect for the first half of the year, the investment team at Oak Harvest recommends that you get on the phone and give our Oak Harvest team a call and ask to speak to one of our financial advisors and planners.  Set up a meeting and sit down with one of our advisors and let our team craft an individual financial plan and long-term investment allocation that meets your financial and retirement needs first, and your greed’s second.

Give us a call at (877) 896-0040 and give our team a chance to help you into and through your retirement years, whether technology stocks are leading the market higher and returning 25% in a year or whether they are down -15 % off their highs, the entire Oak Harvest team is here to help you navigate your retirement.