Tech pumped Trump’s bump

Before outgoing president Donald Trump pardoned the Thanksgiving turkey last November, he took the
opportunity to highlight his incredible contribution to US stock market performance. In a 60-second press conference Trump said: ’The stock market Dow Jones Industrial Average just hit 30,000, which is the highest in history. We’ve never broken 30,000, and that’s despite everything that’s taken place with the pandemic,’ he said. ’Never been broken, that number. That’s a sacred number, 30,000,’ he added.
And to be fair to a man so noted for his hyperbole and misplaced self-congratulatory behaviour, the US did indeed lead global stock markets to surprisingly positive returns in 2020.
A report from asset manager Schroders reveals that ‘despite recording the worst drop in economic activity since the Great Depression, 2020 turned out to be a very positive year for financial markets’. The MSCI All-Country World Index returned 16.8%, thanks in large part to returns of 21.4% from the US market.
Yet before investors start believing that even during such dreadful conditions the markets are a safe bet, analysis from Schroders reveals an over-reliance on the tech sector for the recent outperformance.
What’s more, at the end of 2020 the top five tech stocks accounted for 22% of the S&P 500 by market cap. Schroders says that without the increasing index concentration and rally in the Big Tech stocks – Facebook, Amazon, Microsoft, Apple and Google (Alphabet) – US equities would have returned 13.9% in 2020. This puts them behind emerging market equities (18.7%) and Japanese equities (14.9%).
Further analysis from the asset manager reveals that whenever there has been sector domination of the index in the past – think car manufacturing in the 1960s – these ‘top dogs’ have been disrupted every decade. As such the US – and by association the world – stock markets are heavily reliant on these tech giants to keep the system afloat.
PIRC has looked at market concentration and the potential damage it can do in other sectors such as retail and asset management, but the tech stock domination reaches another level. More assertive anti-trust policy – something US politicians have shied away from but their European equivalents are more enthusiastic about – could be a significant factor in future valuations. This is certainly an area on which investors should keep a close eye.
* PIRC is holding a webinar on industry and ownership concentration next Tuesday 2nd Feb at 3pm.

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