Are today's tech stocks destined to be tomorrow's duds?
By Charles Heighton of King's College London, VP of Trading at King's Global Markets and The London Financial Editor of Markets
I know what you are thinking, what a stupid title. No one could reasonably predict that current tech stocks will not be dominant for an almost infinite period. What could feasibly replace the technology companies that dominate our world like Apple, Google, and Microsoft?
The US stock market has a history of sectors looking unstoppable, but they always eventually fall from grace. The below chart is a stark reminder of this. Looking at the data like this it is hard to believe that tech stocks will retain their crown forever
This chart is a representation of the 12 sectors that have played pivotal roles in the American economy going back two centuries. As you can see, transportation was a dominant sector for decades. However, today it is not even large enough to be classed as its own sector by the Global Industry Classification Standard (GICF). That is an astonishing fall from grace. I doubt anyone in the 1830s was predicting the decline of the importance of transportation companies but it happened in a relatively short period.
Financials saw a similar fall, while they remain a dominant industry today, they are nowhere near the peak of their power in the 1800s. Although this chart does not show it, technology is more dominant today than it was a decade ago. But based on the trajectory of all other sectors, it is almost improbable that it will retain its crown.
Every sector on that chart has ebbs and flows, as an investor it is vital to remember that. This year has seen an overpowering rally in tech stocks but it is important to remember that the past does not equal the future. More bluntly, this trend may not hold further down the line; they might be the golden child of today’s market but the odds of that continuing are slim. This highlights the futility of long-term stock predictions.
Some market observers will claim that this time is different (as they always do) but they have not been right yet. Until proven otherwise one should assume that the same chart in 50 years will look massively different. To do otherwise would be unfathomable hubris.
In essence, no sector dominates forever, even if it looks unstoppable at the time. It is vital that investors are always diversified and never buy the hype.
Chart originally sourced from: https://ritholtz.com/2020/09/10-wednesday-am-reads-207/
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