In the year 2000, when the historic “Tech Bubble” popped, millions of investors were left holding the bag after their financial advisors over-concentrated them in unsuitable and risky high technology and internet stocks.
What followed was a wave of investment fraud cases against firms like Merrill Lynch, Morgan Stanley and Citigroup, whose research analysts hyped companies with limited revenues and earnings into a bubble, only to see it pop.
Back in the late nineties, investors at the urging of their brokers, made big bets on stocks like Pets.com and InfoSpace, with money for their retirement and children’s college education only to be wiped out when those companies cratered.
It looks like history could be repeating itself. With the sharp decline in tech stocks since the market hit its high in early February, many investors are worried that this could be deja vu. .
Furthermore, the recent fall in tech stocks hurts even so-called passive investors, meaning retirees who have the bulk of their investments in mutual funds at companies like Vanguard or State Street, which sell low cost mutual funds that mimic the returns of stock market indexes like the S&P 500.
“The clobbering tech shares have taken in recent days has magnified not only how influential these companies have become in people’s everyday lives, but how much sway they have gained in global stock markets,” the Wall Street Journal recently noted.
“Investors’ concern is that these companies have in recent years grown so much and so fast that they now have outsize influence on broader stock indexes, such as the S&P 500 and the Nasdaq Composite,” according to the Journal. “Their rapid gains have come alongside heavy inflows into passive funds that track these indexes, leaving millions of investors susceptible to greater downside should tech stocks struggle more.”
The so-called FAANG stocks, Facebook, Apple, Amazon, Netflix Inc. and Google parent Alphabet Inc., “together account for 7.8% weighting in the S&P 500, more than double from five years ago,” according to the Journal. “The overall tech sector now has 26.8% weight in the S&P 500, making it by far the largest component.”
This year’s pain for investors has been severe to say the least.
“The unwinding of the most crowded trade of the year – – big tech – – has contributed significantly of the shaving off of half a trillion dollars in total market cap from the S&P 500 technology sector, according to WSJ Market Group,” Bloomberg News reported.
Facebook, which is weighed down by controversy over how it handles users’ data and privacy concerns, has fallen 10% in the past month. Both Apple and Google are just about flat for the year on concerns that tech firms might face tighter government regulation.
The Trump administration has taken particular aim at Amazon, seeking to roll back its tax benefits and going after the firm for killing the retail job market.
Uber, the privately held tech ride-sharing giant, is also facing questions as a result of potential liability on self-driving cars involving a fatal crash.
By the start of this week, the so-called FAANG stocks have lost roughly $324 billion in market capitalization since March 16.
True to its nature, Wall Street is shying away from caution and urging investors to throw more money at the highly volatile tech sector. Big bank analysts as a chorus are again pumping up tech stocks with “buy” ratings to support their firms’ investment banking business, according to a recent Journal article.
If this trend continues, expect another wave of investment fraud complaints resulting from unsuitable over-concentration in the still-risky high technology stocks.
2018 is shaping up to be “Tech Wreck 2.0.”
Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers. The firm may represent investors in cases against companies mentioned in this blog.
Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.