The gap in performance between the tech-biased Nasdaq Composite and its rival benchmarks in the first half of 2020 has been dramatic. The index has enjoyed an ever-widening lead between itself and the Dow Jones Industrial Average and the S&P 500 index.
Much of this is down to the perceived resilience that technology companies have within the pandemic. The theory is that the structural growth these stocks offer is more immune than the cyclical growth seen elsewhere in the market.
The Nasdaq rose an impressive 12% in the first half of the year. Meanwhile, the Dow fell 9.6%, the S&P 500 was down around 4% and the small-capitalisation Russell 2000 index was off more than 15% over the period.
The main benchmarks staged a strong resurgence from the lows of March. From then until the end of the first half of the year, the Dow gained about 37%, the S&P 500 gained 36% and the Russell 2000 climbed 41%, while the Nasdaq surged by more than 43%. Ultimately, this underpinned the Nasdaq’s better first half performance.
According to Dow Jones Market Data, the last time the Nasdaq was higher in the middle of the year while the Dow and S&P 500 were down was back in 1977. This is also only the second such occurrence since the Nasdaq was formed in 1971.
The Nasdaq is also enjoying the best outperformance against the Dow since 1983, when it had a 20.3-percentage-point lead. It’s also the widest half-year divergence between the Dow and the S&P 500 since 1983, when it held a 17.6-percentage-point lead.
The technology giants that are shaping the overall industry have done much of the heavy lifting. These include Apple, Microsoft, Amazon, Alphabet and Facebook, which have all contributed outsize returns to the index. Because the Dow has more of a bias towards companies considered more attuned to the economic outlook, it is no surprise that it has lagged.
Despite the strong first half of the year for the Nasdaq, UK investors should keep in mind that back in 1983, the Dow and the S&P eventually went on to outperform the Nasdaq. The Dow gained 3%, the S&P 500 fell 1.9% and the Nasdaq tumbled a 12.6% in the remaining six-month period. Technology investors should not get too ahead of themselves.
And as we head into another US quarterly results season, investors are still unsure as to how to look at the investment environment. On the one hand, the US government reported that a record 4.8m jobs were created in June. Economists were expecting only 2.9m jobs. The unemployment rate also fell to 11.1% from 13.3% in May. Economists were expecting a rate of 12.4%. Major employment surprises support market performance as they provide a blueprint for a faster recovery than expected, even if the earnings picture looks challenging.
S&P 500 2020 earnings growth estimates (year-over-year % change)
At the same time, it is hard to get carried away when it is clear coronavirus conditions remain challenging. The US once again reported record one-day spikes of new coronavirus cases recently. And if that wasn’t enough, Dr Fauci, director of the National Institute of Allergy and Infectious Diseases, said in an interview that the virus may be mutating to become more transmissible, with high viral loads.
“We don't have a connection between whether an individual does worse with this or not. It just seems that the virus replicates better and may be more transmissible. But this is still at the stage of trying to confirm that,” said Fauci.
The study he references states that the new strain “has become the most prevalent form in the global pandemic,” and that it differs from the one that struck Wuhan, China earlier this year. That doesn’t sound great.