In the late 1990s, I lived in New York City and interned at my godfather's firm, Moness-Crespi and Hardt.
I still have flashbacks to the dotcom hay-day of 2000- listening to ABC News tell me that AOL would take over the world and that Yahoo was the quintessential company to own.
Where are they now? GONE!
Let's discuss what Covid-19 is doing to the economy.
It was a giant power grab. While the tangible economy crashed, the virtual world excelled. Over the last quarter, e-commerce and internet-based companies grew beyond anyone's imagination.
While Covid-19 rages in our daily lives, sizeable multinational technology companies and internet commerce soak up your spending money and time and become a massive part of the major indexes in the stock market - notably, for this article, the S&P 500.
FAANGM (Facebook, Apple, Amazon, Netflix, Google, Microsoft) composes more than 25% of the S&P 500 - more significant than the Dotcom market share of 2000.(Bloomberg.com)
FAANGM has grown so much this year that they are now worth a combined 7 Trillion dollars in market capitalization (7/12/20). To quantify the sheer size of that money - totaling the combined GDP of a few European countries, Spain is lovely this time of year. These companies could pay cash for the entire value of the land.
These Technology companies are likely scared of a real economy, and when there is a vaccine that helps people go back to work and have an everyday life, money could leave FAANGM and go into other areas.
After Covid-19 - irrespective of who wins on November 4 - some of these huge companies could have Anti-Trust suits and Privacy legislation waiting at their doorsteps! Legislators are bidding time until a natural economic recovery (Ie, manufacturing, transport, etc.). Failure to wait for the real economy to recover will worsen the recession.
How can we prepare for an impending shift in market allocation? I have a few strategies ranging from conservative/to aggressive.
An aggressive example would be the S&P 500 High Beta Index, which would make for an exciting conversation. This Index consists of 100 stocks from the S&P 500 with the highest sensitivity to market movements, or beta, over the past 12 months. This is more relatable to the underlying economy, which, to be frank, is slow.
Science will find a way to win against Covid-19 - though it may take longer than hoped. When this happens, there will be a few industries that could experience a sudden surge in capital. The Index is a good representation of this surge. Last month, there was an example of what I am getting at; below is what triggered the reaction. From June 1 to June 9, ADP released a better-than-expected number of jobless claims, and progress was announced on a vaccine trial. The S&P 500 High Beta Index exploded 21.66% in 7 trading days.
The bottom line is that investors will likely follow Tech until the cows come home, but looking at ideas not in the center lane could be very interesting and more attractive under the right conditions.
All my best,
Christopher Lakian
July 23rd, 2020
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