I remember being in high school when I received an America Online CD in the mail and “dialing in” for the first time. It was an amazing experience. That is, until someone called, which meant you were bumped off and had to dial in again. Fast-forward to last week when my five-year-old used an iPad to communicate with her teacher for the first week of school… and in case you were wondering, she used it much more proficiently than I could.
It’s amazing how much technology has changed our lives. It’s even more amazing to watch the speed at which it continues to improve and evolve. With the tech sector’s standout performance this roller coaster year, a valid question about investment philosophy comes to mind. Is technology the new consumer staple?
Consumer staples are those items we rely on every day such as groceries, household goods, and cleaning supplies. We can’t live without those items and purchase them regardless of the condition of the greater economy. Because of this, consumer staple stocks have historically provided more stable, consistent returns than some other sectors and usually a nice dividend. But this has come in exchange for potentially missing growth opportunities. On the other hand, the tech sector has historically been known as high risk/high reward. And while the nature of technology does lend itself to that tradition, this year shows just how much we’ve come to depend on many of these companies.
When COVID-19 forced a quarantine and shutdown of much of our economy, we turned to technology for virtual meetings, education, shopping, entertainment, and social connections more than we already were. We’re witnessing just how much these various platforms have become necessity, rather than just a discretionary service. Have they moved from a “want” to a “need”? At least for 2020, the answer is likely yes. Stock returns support this idea.
While the S&P 500 rebounded impressively to a 4.4% gain on the year as of August 14, 2020, the NASDAQ 100, a more tech-heavy stock index, was up as of the same date a whopping 28%! It’s also interesting to note that the big five tech companies (Apple, Amazon, Microsoft, Alphabet, and Facebook) make up 21% of the S&P 500’s value. This means that the S&P’s return thus far this year would look a lot different if not for the strong returns of these tech companies.
This is not to say that the technology sector no longer comes with risks. It certainly does. Investment in this area is not for everyone. New technology is constantly being introduced, meaning today’s winner can become tomorrow’s loser. However, it is interesting to see how 2020 has exposed our reliance on technology to an even greater degree than we probably realized, and that’s not likely to change anytime soon.
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