FAANG shares are issued on Nasdaq.
Adam Jeffery | CNBC
In the past, investors and traders have turned to less risky assets like US Treasuries to weather the volatility and uncertainty of the market. However, during the corona virus pandemic, they turned to an unlikely place: technology and software stocks.
Apple, Netflix, Microsoft and Amazon stocks are all trading at or near record highs. All four stocks rose by at least 29% by 2020, contributing to the massive outperformance of the Nasdaq Composite versus the S&P 500 this year. The Nasdaq rose 17% this year, while the S&P 500 fell over 2% over that period.
Wall Street flocked to these names because they believe that their business models can not only survive this downturn but also thrive. This has caused large tech and software stocks to appear to behave like a safe government bond, a dynamic that was felt during the week.
"It is clear that the Covid cases across the country have won people over to these software and internet games," said Christian Fromhertz, CEO of the Tribeca Trade Group. "These stocks are clearly the best and will stay that way until something changes."
The US reported record daily coronavirus increases this week. According to Johns Hopkins University, more than 63,000 new coronavirus cases were confirmed in the U.S. on Thursday. The country's seven-day average also rose to over 53,000 this week.
At the state level, Florida's hospitalizations related to coronaviruses reached an all-time high. Nevada has reset a state bar reopening plan.
This grim data is putting pressure on stocks that would benefit from the reopening of the economy this week. American Airlines has fallen by more than 8% and United by almost 10% for weeks. Gap shares fell more than 3% during this period.
Big Tech – once considered one of the most risky groups on the stock market – shone this week. Microsoft rose about 3% over this period, while Netflix and Amazon rose more than 10% to record levels. Apple also hit an all-time high, jumping around 5% a week.
These stocks rose alongside the 10-year US Treasury note. The 10-year yield started the week trading around 0.7%, but later fell to around 0.6% (yields move in reverse to prices).
Investors argue that what makes these companies so attractive during this pandemic is their steady cash flows and recurring earnings at a time when the clarity about the corporate earnings landscape is minimal.
"What these companies do for them is the whole idea of a strong balance sheet and recurring revenue," said Rebecca Felton, senior portfolio manager at Riverfront. "Recurring revenue in an environment where cyclicals may slow down is really important."
"It feels right to hold onto the quality and growth you can count on," said Felton.
Microsoft, Netflix, and Amazon all have subscription-based services that generate recurring earnings monthly or annually.
If the Fed forces interest rates to zero, they will push investors on the risk curve to generate income and growth … If I am forced into stocks, which the Fed clearly does, I will own the stocks at that I feel best about, and large-cap technology has become a safe haven.
President of GuideStone Capital Management
In the last quarter, Microsoft's Office 365 users grew from 37.2 million in the past three months to more than 39 million. Amazon now has more than 150 million paying Prime users. There are more than 180 million paying Netflix subscribers worldwide.
Another thing that makes some of these stocks attractive is high dividend yields compared to US Treasuries.
According to the FactSet, Apple and Microsoft currently achieve a return of 0.86% per share and 0.96%, respectively. The 10-year treasury note now has a return of around 0.6%.
Of course, stocks are inherently riskier than Treasuries because they are not supported by the U.S. government. Treasurys also offer investors a consistent interest payment until maturity, while dividends can be cut or suspended at any time.
Tech stocks are also exposed to an increasing regulatory risk that could put them under pressure. Chamath Palihapitiya, founder and CEO of the investment company Social Capital, believes that – along with the possibility of higher taxes and new product experiences – this is a bearish case on Facebook and the Google parent alphabet.
"Big Tech's long-term success is no longer about better products," Palihapitiya said in a tweet on Friday. "They are incumbents and their success is now a multi-dimensional problem of competition, antitrust, tax and regulation multiplied by EVERY city, state, country and jurisdiction in which they operate."
However, David Spika, President of GuideStone Capital Management, believes it is advisable to use big tech as a safe haven, given that US monetary policy is so simple right now.
The Federal Reserve cut interest rates to zero in March to support the economy during the pandemic. The U.S. Federal Reserve has also launched unprecedented monetary stimulus programs, including buying corporate bonds.
"If the Fed cuts interest rates to zero, it will push investors on the risk curve to generate income and growth," said Spika. "If I am forced to stocks, which the Fed is clearly doing, I will own the stocks I feel most comfortable with, and large-cap technology has become a safe haven."
Time will tell how long this will take and when big tech stocks will again act like stocks with individual risks.
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