Tech Selloff May Be Worse Than Everyone Thinks… But I’m Not Worried
If you’ve been heavily invested in the high-growth tech sector, the recent market volatility has been a nauseating ride.
The tech-heavy Nasdaq is down about 7% from its all-time highs. But the pain goes even further than that. This is because the capitalization-weighted index has been buoyed by the likes of Apple (Nasdaq: AAPL), which is near all-time highs, and Microsoft (Nasdaq: MSFT), which is still trading near its highs.
As a quick aside, for indexes such as the S&P 500 and Nasdaq, the stock components with higher market caps receive a higher weighting in the index. This can sometimes disguise what’s really going on in a sector, as the big names dictate most of the movements.
If you dig deeper into the tech sector you can see the carnage. For example, we can get a good idea of the extent of the mayhem by looking at one of last year’s darling technology-focused exchange-traded funds (ETFs): ARK Innovation (NYSE: ARKK).
You can see in the chart below why Cathie Wood’s flagship fund was the talk of Wall Street last year. It ripped off a spectacular 152% return in 2020. But since peaking at the beginning of this year, the ETF has lost over 40% (as of this writing).
If we dive into the fund’s holdings, it paints a clearer picture of what many investors have felt during this latest market turmoil: pain.
The second-largest holding, Roku (Nasdaq: ROKU), is not only down over 41% year to date, but it’s down 29% in the past month.
Pandemic darling Zoom Video Communication (Nasdaq: ZM) has lost 48% of its value this year, and 32% in the last month. This is ARKK’s fifth-largest holding.
Here’s the one-month performance of other notable top holdings of ARKK:
The conclusion we can draw from this is simple. There is clearly a bear market that’s developed within the tech sector.
Why This Is Just A Speed Bump For Us
Over at Top Stock Advisor, we’ve felt some of that pain. In fact, one of our portfolio holdings is listed in the table above. It’s taken a beating in the last month. And two of our more recent additions are also tech names that you could put into this category (small/mid-cap, innovative, high-tech names).
The recent pain doesn’t change my opinion and belief in these companies over the long run. I remain bullish on all of them. But while the investors who piled into many of these tech stocks are wondering how much lower their portfolio can sink, the recent volatility has been just a road bump for the Top Stock Advisor portfolio.
Despite the turmoil in the tech sector, we have a number of stocks either hitting new highs or trading really close to their highs. That’s because, while I think there are a lot of tech names out there with a lot of long-term upside, we haven’t put all of our eggs into one basket.
Longtime readers know that I’ve said the main goal for most individual investors should be to follow Warren Buffett’s lead and find wonderful businesses trading at reasonable prices.
For example, somebody forgot to tell The Hershey Company (NYSE: HSY) that stocks were supposed to be going down. Shares of the chocolate maker continue to climb higher.
If I would have told you a little over three years ago that HSY would beat the S&P 500, would you believe me? After all, there’s nothing incredibly exciting about chocolate. Sure it tastes good, but there’s nothing disruptive about chocolate. It’s not sexy. Yet because Hershey is a capital-efficient business, and we bought in at a very reasonable price, it continues to reward us year after year.
The same is true for a number of our other holdings over at Top Stock Advisor. In fact, we have at least five other stocks also trading at or near all-time highs in our portfolio. For many of them, it’s the same story…
Over the past couple of weeks, I’ve mentioned that I remain bullish on stocks going into the end of the year and in 2022.
It also turns out that someone else is perhaps even more bullish than me. Bloomberg reported on December 14 that one investor threw down a $65 million bet on a quick market rebound. They purchased roughly 20,000 call spreads that are linked to the S&P 500 — betting that we will see a rally in the market before the Christmas holiday.
It may pay off. The market rallied after the Federal Reserve’s highly anticipated announcement on Wednesday, December 15. The Fed laid out its plans to battle inflation with three proposed rate hikes in 2022, which was seen as more dovish (or less hawkish) than investors were expecting.
But the bottom line is that with this important Fed meeting in the rearview mirror, which was creating a lot of uncertainty in the markets (and markets hate uncertainty), we may finally see the “Santa Claus” rally as we head toward the finale of 2021.
But even if we don’t, you can see why it’s important to have positions like HSY in your portfolio. While the tech sector continues to experience some volatility, we can sleep easier at night knowing that we have stocks like this working to offset some of the near-term pain.
Editor’s Note: Elon Musk just made a MASSIVE announcement about his latest innovation…
Musk broke the news that his latest project will come out of its beta-testing phase soon. And the second it goes “live,” it promises to be the beginning of a new era for internet. And while the tech behind this secretive project is impressive… it’s an even better opportunity for your portfolio.