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How To Beat The Stock Market In 2018


In this photo illustration, logos of the Google, Apple, Facebook, and Amazon (GAFA) are displayed on the screen of a computer on May 31, 2018 in Paris, France. The acronym GAFA refers to the four most powerful companies in the world of the internet: Google, Apple, Facebook and Amazon. The European Union has decided to better tax the giants of the internet with Brussels proposing to tax 3% of income generated by the data of users of Internet companies. This new tax would bring in 5 billion euros a year in the European Union. (Photo by Chesnot/Getty Images)

You must be in the hottest, most dynamic technology shares to beat the market handily. You must be in Amazon, Facebook, Apple, Google, Netflix and other technology shares. That is the crucial stock market lesson that defines 2018 so far.

The facts and numbers are overwhelming. Over the past year alone technology shares have outperformed the Standard & Poor’s 500 index by a ratio of 4 to 1, according to market analyst Jim Paulsen of Leuthold Group in Minneapolis in a June 8 memorandum.  That is the greatest differential this past half decade. Over the whole five years, tech outpaced the index by a 2 to 1 margin.

Even more amazing is the performance of the S&P 500, which is essentially flat so far this year without including the 15% gain from all technology shares. The accelerating outperformance of technology stocks against the persistent underperformance of stock groups unattached to technology tells you something about the financial system today. There is a rush of investment fund flows into technology sector ETFs as well. Just consider that Amazon has moved in a year’s time from under $1000 a share to almost $1700. Very few investors have seen moves like that over 52 weeks.

The aspect to be deeply considered is the meaning of the market action narrowing down to favor one group of high-flying stocks. Sometimes in the past, this is a sign of a coming correction in the marketplace. Leuthold’s Paulsen is reminded of the dot-com explosion in the late 1990s, which turned into a terrible bear market for technology shares, but 2000 did not include the likes of Amazon, Apple, Facebook and Google (Alphabet).

Just think about it. Bank America-Merrill Lynch reports that in May alone technology shares amounted to 75% of the S&P 500 return, and today represents 26% of the index. Just in the first quarter of 2018, the tech sector of the S&P 500 delivered a resoundingly impressive 34% growth in earnings. No wonder hardly any Wall Street analysts are putting out sell recommendations on the technology group. According to Goldman Sachs, the 20 largest technology giants have a total market capitalization of more than $6 trillion. It is the only part of the stock market where there is a sense of euphoria that seems more powerful an energy than the talk of needed regulation for the likes of Facebook. There has been no more of a mass movement against the notion of sharing data with the likes of Facebook and others.

So worries this spring about the lasting strength of the tech group look misplaced at this moment in time. We’re in a dynamic growth cycle for the tech giants. No less an investor than Warren Buffett admitted at his May annual meeting that he misjudged the investment prowess of Facebook and Amazon.

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