One of the most useful ways to identify market trends is by comparing the performance of one asset against another, then look at how they’re similar or different. It's a simple exercise, but one that can lead to powerful conclusions.
The chart below compares the performance of the tech-heavy NASDAQ against the S&P 500, a broader measure of US equity markets, for the past five years. During that time, the NASDAQ outperformed the S&P by nearly 30%. A lot of factors contributed to this dynamic, but overall I view this as reflecting investors increasing appetite for risk in the years after the financial crisis.
As the market recovered, investors became increasingly convinced that the Federal Reserve would backstop markets, and that traditionally higher risk investments (like technology companies), may carry a lower risk thanks to what used to be called the “Greenspan Put.” That coupled with ultra-low interest rates drove investors to take on greater risk in search of returns.
The next chart shows the same comparison, but over just the past two years. The NASDAQ has still outperformed the S&P, but the gap has narrowed considerably since the start of 2016.
Drilling down to the past six months, we can see that the chart has flipped, and that the S&P has outperformed the NASDAQ. I’d attribute this shift to two primary factors.
First, investors have recently become wary of the valuations of technology companies, which have come under fire this year. The first quarter was ugly even for bellwethers like Apple and Google, and less established firms like Splunk and even LinkedIn saw their shares collapse on less than stellar earnings reports.
Second, as events of the past week have hammered home, investors in general are de-risking portfolios. Last Friday’s Brexit-induced selloff saw red across the board, not just in sectors directly linked to the possible fallout of England leaving the EU. Only perceived safe-havens like Treasuries and gold traded up that day.
Stocks have recovered from Monday’s lows, but even in the past week investors like the broad market a little bit more than they like tech. If funding for tech startups continues to dry up, expect that trend to persist for the foreseeable future.