The Nasdaq index launched in 1971 with a value of 100, while the S&P 500 was valued just below 100. This ~1:1 ratio between the Nasdaq and S&P 500 persisted throughout much of the 1970s and 1980s. However, beginning in the mid-1990s the Nasdaq significantly outperformed the S&P 500 so that by 2000 the ratio of the Nasdaq to the S&P 500 was 3:1. This marked the peak of the Nasdaq (Dot.com) bubble:
S&P 500 depicted in blue; Nasdaq index depicted in red.
Source: Yahoo Finance
Over the next two years the Nasdaq lost 75% of its value and the S&P 500 lost 45% of its value. Today the ratio of the Nasdaq to the S&P 500 index is again over 3:1 marking an outperformance for Technology stocks similar to the Dot.com bubble in 2000.
Politics and Profit
In a time of bitter political partisanship, investors should note areas of agreement. Today both Republicans and Democrats lament larger technology companies (such as Facebook, Amazon, Apple, Netflix, and Google). Given bipartisan lamentations and surging stock prices, investors would be wise to underweight Technology.
While we are underweight Technology, we are overweight Materials. A majority of Americans support infrastructure spending. Given bipartisan support for traditional infrastructure spending (ie improving roads and bridges), investors are wise to overweight Materials which will likely benefit from infrastructure spending.
Massive government spending caused money supply to surge, and much of this money will be used to purchase consumer goods. For this reason we are also overweight Consumer Discretionary.
Given the Nasdaq’s outperformance over the past decade, we are underweight Technology. However, we remain bullish for the S&P 500 and very bullish for Materials and Consumer Discretionary.
This report reflects the current opinion of the author. The report is based upon sources believed to be accurate and reliable. Opinions and statements about the future expressed in the report are subject to change without notice. The report is not a solicitation or an offer to buy or sell any security.