It has admittedly been an exercise in futility to call a top in technology stocks.
After all, long-term performance numbers for tech stocks remain extraordinary. And as the S&P 500 (.SPX) butts up against new highs, there isn’t a lot of reason for panic.
Still, some cracks have started to emerge in Big Tech in recent weeks.
Soon after Facebook’s (FB) ugly earnings report, investors pulled roughly $2.4 billion out of the popular Nasdaq-100 index fund, the Invesco QQQ Trust (QQQ). That figure is three times the amount lost by any other equity ETF, according to reports. “Of the 51 tech sector ETFs tracked by XTF.com, only two had significant positive flows” in the week after the report, CNBC noted at the time.
In fact, the data show that many investors are increasingly looking at defensive sectors thanks to a growing “risk off” mentality.
Take dividend stocks. The fundamentally defensive nature of these stocks, particularly those with sustainable and growing payouts, has made them incredibly attractive amid the volatility in tech. Consider that three of the largest dividend funds — iShares Core Dividend Growth ETF (DGRO) the Schwab U.S. Dividend Equity ETF (SCHD) and Vanguard Dividend Appreciation ETF (VIG) — have sucked up a collective $2 billion in 2018, according to Bloomberg data.
The broader safe haven of value investing has also returned to the fore. Though the Russell 1000 Growth Index (.RLG) has consistently outperformed the Russell 1000 Value Index (.RLV) over the past few years, the story has been different in the wake of the tech earnings meltdown, with value pacing ahead since July 25.
All this is not to say that tech can’t come back, and that there aren’t individual names worth pursuing. But if you’re worried that the tech-sector rally is getting long in the tooth, here are some potential investments.
Right now, banks are riding both a favorable political climate in Washington — something not many other sectors can say given trade-war uncertainty — as well as the flight to value. Thanks to a big reduction in the corporate tax rate and a move by regulators to cut back Dodd-Frank restrictions, bank stocks are among the best performers in 2018.
There has been a bit of concern that this is getting to be a crowded trade, but take megacap Bank of America (BAC) as a good case study. The stock has climbed more than 10% since July 1 as it bumps up against a new 52-week high. Furthermore, it remains attractive as a value play with a price-to-book ratio of 1.3 — at the low end of the market, even after its run.
In mid-July, just before tech really started to roll over, Barron’s wrote that utility stocks are “worth a second look” thanks to the continued attractiveness of their yield, as interest rates have plateaued despite continued talk of tightening at the Federal Reserve. Consider that flagship utilities fund the Utilities Select Sector SPDR ETF (XLU) boasts a yield of about 3.3% at present while the 10-year Treasury still yields just south of 3.0% and the broader S&P 500 yields just 1.8% or so.
Separately, there are few industries safer from a trade war thanks to the 100% domestic focus. And while some businesses have cyclical power demands, the baseline business of utilities is sure to keep these stocks chugging along regardless of economic trends.
That’s in part why a few big utilities, including First Energy (FE) and NRG Energy (NRG) are both up more than 15% year to date. And while the sector as a whole hasn’t burned down the house in 2018, utility stocks have been trending higher since tech’s recent choppiness; the popular Utilities Select Sector SPDR ETF (XLU) is up about 3% in the last 30 days.
Big pharma also stands out as a recent outperformer. Take Pfizer (PFE). The stock is trading at a new 52-week high thanks to strong earnings that sparked a double-digit run in the last month or so.
Other highfliers include Eli Lilly (LLY) up against new highs after a nearly 20% gain year-to-date, and both Merck & Co. (MRK) and GlaxoSmithKline (GSK) which have climbed more than 15% since Jan. 1.
Large-cap drugmakers aren’t as sexy as the smaller biotechnology companies that make flashy headlines with big growth and innovative new treatments. But stable revenue streams, above-average yields and the recession-proof nature of the health-care sector in general makes these stocks a nice place to hide if you’re souring on technology companies.
OK, hear me out. I know that e-commerce in the age of Amazon.com (AMZN) remains a big challenge. But with record consumer spending at home and with many of the biggest brands in retail booking nearly 100% of their revenue within the U.S., there is relative isolation from any trade-war fallout. Furthermore, many of these names show evidence of “value” after selloffs in prior years.
On top of that, retail is having its best quarter in roughly four years with a double-digit rise for stock prices across the sector in the second quarter. That’s in part thanks to a general feeling that the worst is over after negativity has been priced in. And with names Kohl’s (KSS) up about 30% this year and Macy’s (M) up almost 50% but still boasting forward price-to-earnings ratios of about 13, it’s easy to see that there are plenty of investors who think there are bargains to be had in this unloved sector. That’s in contrast to the stretched valuations in some tech stocks like Netflix (NFLX) and Amazon that both have forward P/Es of more than 70.
Of course, there’s nothing saying you have to stick with stocks. Despite the risk of rising rates, Bloomberg reports that bond funds and fixed-income ETFs have come into favor in a big way. Fixed-income ETFs took in $4.6 billion in July, “almost double the total flows into equity ETFs and the most of any asset class,” according to recent Bloomberg Intelligence data. “That follows the $7.5 billion added to fixed-income exchange-traded products in June, compared with losses of $7.2 billion in equity ETPs.”
Not only is the size of the rotation into bonds and fixed income over the past two months noteworthy, but it’s also represents a dramatic shift in sentiment. Bloomberg data showed a “buy the dip” mentality earlier in 2018, when corrections in April and May were met with added exposure to equity funds instead of a drawdown as we saw more recently.
To wit: The biggest index fund of them all, the $265 billion SPDR S&P 500 ETF (SPY) suffered $5 billion in outflows in one week at the end of June and kept bleeding cash in July even as flagship bond funds like the iShares U.S. Treasury Bond ETF (GOVT) gathered above-average inflows in almost direct response to volatility in the tech sector. That bodes well for bonds, even amid potential interest-rate risk as the Fed is widely expected to raise interest rates again in September.
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