In the week following Facebook’s historic stock shock that wiped out US$150 billion of market value, we’ve heard lots of media speculation about an imminent correction and tech bubble.
After all, recent gains in the U.S. stock market index have been driven by explosive growth of the so-called FAANG companies (Facebook, Amazon, Apple, Netflix and Google’s parent company, Alphabet).
For two of them to report worse-than-expected quarterly numbers (Netflix fell short on subscriber growth), plus similar disappointments from Twitter and Intel, was read by some as an ominous sign.
I can’t discount the view that this technology-led market can’t run up forever. But I think the headlines overshadow other fundamentals that deserve attention.
Here are five pluses to help you keep perspective and stay invested with confidence.
- The U.S. economy looks strong
The world's leading economy still looks very much on track, which should be good news for investors. Last week, the U.S. reported very strong GDP growth of 4.1% for the second quarter. Earlier this week, as the Fed decided to hold rates steady, it noted that economic activity has been rising at a strong rate. Additionally, inflation remains low and in check. Business capital spending was also up 7.3%.
- By and large, more hits than misses
Of the second quarter corporate earnings released to date, the numbers have generally been very good. Close to 90% of companies reporting financials have beat analysts’ expectations and forecasts. Even among the tech giants, Apple reported its best March quarter, en route to become the first publically traded U.S. company to be valued at US$1 trillion. Amazon is next in line to achieve that milestone.
- Our portfolios are well diversified
Market corrections, such as that of Facebook, pinpoint why we don’t build a portfolio with just one or two stocks. A well-diversified portfolio helps manage risk and lets us be ready for market opportunities. We don’t only diversify by sector and geography, but also by investment style. While markets have rewarded growth style investing lately, our blended approach also recognizes traditional value indicators, for when a value style of investing comes back into favour.
- There’s a world beyond tech companies
It’s easy to relate to companies that make things we see and touch everyday: the phone in your pocket or the social network you chat on. But it isn’t only Facebook and Amazon and Netflix that can make you money in this market. There’s a world of great companies outside the technology sector bringing us steady yields.
Over the past 12 months to the end of July 2018, most of the top performers in MD funds, pools and portfolios have generated healthy returns with far less fanfare than the FAANGs.
For instance, we’ve seen stellar returns from clothier Lululemon Athletica Inc. (102.6%), energy company ConocoPhillips Corporation (68.79%), entertainment firm Twenty-First Century Fox, Inc. (63.13%) and financial services business Mastercard Incorporated (62.25%), looking at holdings in the MDPIM U.S. Equity Pool over that time period.
Corrections aren't bad
Popular stocks can reflect a herd mentality by people chasing performance and who want only the top performers. While this “fast money” can take a lot of value off of a stock in a correction, this also resets expectations. Is it a good company to begin with? If so, a correction might bring us an opportunity.
Let’s not forget, even the mighty Apple took a fall for reporting lower iPhone sales in April 2016, when it traded at $90 a share. Today, the stock is valued over $200.
Keep perspective, through good news and bad
As much as everyone would like to capture 110% of the upside and 0% of the downside of markets, that’s unfortunately not the way investing works. Market volatility is a two edged sword—to obtain the upside over a long term, we may inevitably experience some downside over the short term.
Despite any negative headlines, and keeping an eye on geopolitical events, we still maintain our healthy and positive outlook for the equity markets. The global economy continues to grow, corporate earnings are strong across geographies and sectors and, as always, we are prepared to make adjustments to our strategy if dynamics change.
Now you know why, through good news and bad news, you can still expect to see tech names among the broad mix of high quality holdings in MD’s diversified funds, pools and portfolios. I encourage you to stay in touch with your MD advisor with any questions about your investments or our approach.