Tech Dominance And Volatility: A Double-Edged Sword

TECH DOMINANCE AND MARKET VOLATILITY: A DOUBLE-EDGED SWORD

The rally by U.S. stock exchanges, and the persistent strength of the economy, since March 2009 has been almost without precedent for a large, developed nation. It must be noted that the advance has been aided, in no small measure, by enormous monetary and fiscal stimulus interventions following the 2008 Financial Crisis and the 2020 COVID pandemic. Nonetheless, the market appreciation has been impressive.

The market advance since 2009 has been led by an unusually small group of tech-related stocks, first the FAANG+ group and more recently the Magnificent 7. It is the American leadership in technology that accounts for much of its dominance of equity markets today, as it did at the previous peak of its influence at the turn of the century (driven by the Internet Bubble stocks).

While American technology leadership seems assured for the foreseeable future, the dominance of a small group of mega-cap stocks (with their premium valuations) does not. A shift in investor sentiment away from the Magnificent 7, and their small coterie of lesser stocks, could have substantial effects on the major U.S. exchanges given their enormous market weights.

This enormous market weighting by a small group of stocks is a potential catalyst for significant market volatility, as is the fragility of the global economy and the steadily deteriorating geopolitical landscape. Markets may continue to rise for some time, but alert investors will be watching for signs of the change in trend that must eventually come. Both dangers and opportunities lurk when markets reach extremes

We believe that the coming months and years will feature unusual volatility which will create significant risks but also great opportunities for attentive investors. These opportunities will come from both the long and short side of markets, and across markets and asset classes.

Each month in our paid service, the Global Investment Letter, I update my investing activities, as well as comment on major global equity, fixed income, currency, and commodity markets.

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