US technology index the Nasdaq hit a new record on Wednesday, a move which underlines how technology stocks have driven the global equity recovery despite the economic fallout from coronavirus.
The Nasdaq closed 66 points higher at 10,020, the first time it has closed above that level. Year to date the tech index is up 10% and has erased all the losses seen during the March sell-off, when the index plummeted to a low of 6,860 points on March 23. Since that date the index is up 46%. In contrast, the Dow Jones (the main US stock market) is down nearly 10% this year.
High-growth tech stocks have driven much of the equity market gains in recent years – at the expense of value shares and some of their most famous advocates such as Warren Buffett. The trend spawned an acronym, FANG, as investors focused on a small cohort of high performing stocks: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG) – whose market worth eclipses the size of economies such as Germany’s.
But when the pandemic sparked investor panic in March, some expected this to bring the bull market, which had lasted a decade, to a crashing halt. What actually happened is that consumers in lockdown realised they needed some of these companies more than ever. This trend pushed shares in retail and e-commerce companies such as Amazon (AMZN) and Ocado (OCDO) higher even as many other bricks-and-mortar retailers struggled. As IG chief market analyst, Chris Beauchamp notes, the sell-off gave investors a window to buy into these companies before they bounced back sharply.
Dotcom Boom
Walter Price, manager of the five-star rated Allianz Technology Trust (ATT) argues that companies in the tech sector are trading at a premium, but that this is justified if they can demonstrate their ability to prosper despite the economic impact of Covid-19. He adds that despite the current high valuations, tech stocks are still not as overvalued as they were in 2000 during the dotcom boom, when the Nasdaq soared to nearly 5,000 points before crashing.
Many consumer and tech-focused managers have commented that certain trends – the move towards a cashless society, flexible working and increasing reliance on e-commerce, for example – have been accelerated with economies in lockdown. “It's as if a decade’s worth of changes in consumer habits and working processes are being telescoped into a few years,” says Price.
A number of this year’s biggest IPOs are expected to be in the wider tech sphere, including data giant Palantir, cloud computing firm Rackspace, online grocery delivery firm Instacart and trading app Robinhood.
The Nasdaq index launched in 1970 with a value of 100 and broke through 1,000 points in 1995 – so it’s taken roughly the same number of years to increase tenfold again. It is weighted by market capitalisation, which means – unlike the Dow Jones, which is weighted by share price – the biggest companies have the biggest weighting in the index.
The index is comprised of more than 3,000 stocks across a wide range of sectors including retail, financial services and healthcare – for example, life sciences company Gilead (GILD), which has been tipped to secure the first coronavirus vaccine.
