Tech Sector Turmoil and the Bear Market

Recent studies have shown that market volatility can be particularly challenging for retirees or those nearing retirement age, as they have less time to recover from any potential losses. According to a report by Fidelity Investments published in October 2021, market volatility can lead to a significant impact on retirement savings for those in their 60s, with the potential to erode retirement income by up to 26%. This highlights the importance of having a diversified investment portfolio and a solid retirement plan in place that takes into account potential market volatility.

During the extremely volatile first 100 trading days of 2022, the S&P 500 index's constituent equities posted their worst performance since 1970.1 The S&P 500 continued to decline, and on June 13, 2022, the benchmark index entered a bear market, which is typically defined as a sustained decline of at least 20% in stock prices. The S&P 500 had fallen 21.8% from its peak on January 3, while the tech-heavy NASDAQ, already in bear territory, had fallen 32.7% from its zenith on November 19, 2021.2

Some investors who are concerned about the future of their portfolios appear to have adopted a defensive posture by selling riskier assets, such as growth-oriented technology stocks.

What's triggering market volatility?
In 2021, businesses across the United States, such as Fortune 500, dealt with unpredictable demand shifts and supply shocks related to the pandemic. However, near-zero interest rates and trillions of dollars in pandemic relief supported consumer spending, boosted economic growth, and drove record corporate profits. Profits posted by S&P 500 companies in 2021 were 70% higher than in 2020 and 33% higher than in 2019, contributing to a nearly 29% total market return. (3-4)

In the early months of 2022, however, investors began to fear that the Federal Reserve's anticipated tightening of monetary policies — intended to cool stubbornly high inflation — would stifle economic development and trigger a recession. In the spring of 2021, prices began to rise due to high demand, supply-chain issues, and a labor shortage that drove up wages. China's COVID-19 lockdowns impacted the supply of products during the first quarter of 2022, and Russia's invasion of Ukraine caused already high global food and fuel prices to skyrocket. In May 2022, the Consumer Price Index increased at the fastest annual rate in forty years, 8.6%. (5)

The relentless acceleration of price increases places pressure on the Federal Open Market Committee (FOMC), which is scheduled to meet on June 14 and 15, to take aggressive measures to combat inflation. Beginning in May, the Federal Open Market Committee (FOMC) increased the benchmark federal funds rate by 0.5% (to a range of 0.75–1.0%). This was the first half-percent increase since May of 2000, and Fed forecasts indicate that there will be more. (6)

Bond yields increase as interest rates rise, and the opportunity for higher returns from lower-risk bond investments makes higher-risk stock investments less appealing. In addition, stock investors purchase a component of a company's future cash flows, which lose value in an inflationary environment. Higher financing costs can also reduce the purchasing power of consumers and the profits of debt-reliant businesses.

The downside of domination
The S&P Information Technology Sector Index has been struck harder than the S&P 500 as a whole, falling 29.2% from its peak on January 3. In addition, the S&P 500 is weighted by market capitalization (the value of a company's outstanding shares), similar to many other benchmark indexes. This provides the largest companies, the majority of which are in the technology industry, a disproportionate impact on index performance. As of May 31, the information technology sector represented 27.1% of the market capitalization of the S&P 500, compared to 14.4% for health care and 11.2% for financials, the next two largest sectors. Apple, Microsoft, Alphabet, and Amazon are the four most valuable companies in the index; Nvidia is ranked ninth and Meta has dropped to position 11. (7)

During the past several years, tech stock gains propelled the market to new heights; however, when their share prices began to decline, they brought down the broader stock indexes. A Wall Street Journal analysis of market data through May 17 revealed that just eight of the largest U.S. companies were responsible for a staggering 46% of the S&P 500's 2022 losses (on a total return basis). (8)

These well-known technology companies have expanded into vast multinational corporations with a significant impact on daily life. Some companies are so dominant in their respective industries — social media, smartphones, online search and advertising, e-commerce, and cloud computing — that antitrust investigations and demands for stricter regulations have been prompted in the United States and internationally. Additionally, they have ample cash on board, suggesting that they may be better able to withstand an economic slowdown than their smaller rivals. (9)

Takeaways for investors
Spreading investments across the eleven S&P 500 sectors is a common method of diversifying stock holdings. But over time, a once-diversified stock portfolio can become overconcentrated in a sector that has outperformed the market as a whole. Tech-sector equities posted massive total returns of approximately 50% in 2019, 44% in 2020, and 35% in 2021; therefore, Fortune 500 employees and retirees may wish to rebalance their portfolios if they are overexposed to this highly volatile sector. (Rebalancing entails selling certain investments to purchase others. Remember that the sale of investments from a taxable account may result in a tax liability.) 10

If you feel disoriented after more than five months of market volatility, we advise our Fortune 500 clients to gain perspective. Some market analysts view recent price declines as a painful but long-overdue repricing of equities with excessive valuations, as well as a reality check caused by diminishing growth expectations. The forward price-to-earnings (P/E) ratio of S&P 500 companies decreased from 23.3 at the end of 2021 to 17.8 in May 2022, which is much closer to the 10-year average of 16.9.11-12.

Before investors can appraise how the economy and corporate profits will ultimately fare in the face of rising inflation and higher borrowing costs, it may be some time, and the stock market does not like uncertainty. In the coming months, disappointing economic data and company earnings reports could continue to ignite volatility.

If you have a sufficiently diversified, all-weather investment strategy, adhering to it is often the wisest course of action in the face of troubling headlines. If you panic and abandon the market during a downturn, you won't be able to profit from its subsequent upswings. And if you continue to invest regularly for a long-term objective such as retirement, a market decline may present an opportunity to purchase additional shares at a discount.

Stocks' return and principal value fluctuate in response to market conditions. When sold, shares may be worth more or less than their initial price. Investments that pursue a greater return typically entail greater risk. Diversification is a risk management technique that we recommend to our Fortune 500 clients. However, it is essential that Fortune 500 employees understand that diversification does not guarantee a profit or prevent against investment loss. The S&P 500 is an unmanaged collection of stocks that is representative of the U.S. stock market as a whole. The performance of an unmanaged index is not indicative of any particular investment's performance. Individuals cannot invest in an index directly. The past is not indicative of future performance. The actual outcomes will differ. Dollar-cost averaging does not guarantee or prevent a profit or loss. These programs consist of continuous investments in securities regardless of price fluctuations. Employees and retirees of Fortune 500 should consider their capacity to continue making purchases during periods of low and high prices. However, this can be an effective method for investors to acquire shares in order to meet their long-term objectives.

Conclusion

Investing in the stock market is like planting a tree in your backyard. Just as you carefully choose the location, type of tree, and soil conditions for your tree, you need to carefully choose your investment strategy, stocks, and market conditions. You also need to nurture and maintain your investment, just as you would water and fertilize your tree. If you are patient and allow your investment to grow over time, you can enjoy the benefits of a healthy tree that provides shade and fruit for many years to come, just as your investment can provide a comfortable retirement for you and your loved ones.

1) SIFMA, 2022
2) 2022 Yahoo! Finance
3) New York Times, 31 May 2022
(4), (7), (10), and (11) S&P Dow Jones Indices, 2022
5) Bureau of Labor Statistics, United States, 2022
6) Federal Reserve, 2022
8) May 19th, 2022 Wall Street Journal
9) New York Times, 20 May 2022
12) FactSet, 2022

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by your company. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Neither The Retirement Group or FSC Securities provide tax or legal advice. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.