Tech Is Down - So Where Are Investors Rotating Towards

seekingalpha07-28

I evaluate alternative investment options beyond large-cap US stocks, including gold, Bitcoin, and municipal bonds, as potential hedges.Alternative currencies like gold and Bitcoin are being used as ...

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Tom Merton/OJO Images via Getty ImagesMain Thesis & Background The purpose of this article is to evaluate the broader equity market and how the recent pullback - especially in Tech - might open up opportunities beyond large-cap US stocks. It is difficult to sour on Tech. I remain very long this sector and the S&P 500 will continue to be my largest holding. But it is not hard to notice that the past couple of weeks have been more volatile than most of 2024 thus far: Last Week's Index Performance (Google Finance)As a result of this pullback, I wanted to take some time to discuss what other options are out there for investors going forward. Despite Tech's recent drop, many sectors/strategies have actually seen gains of late, and I think those are worth exploring if the current re-positioning continues. In this review, I will tackle a few ideas that I have advocated for in the past and believe still have value today. These include alternative currencies, metals, small-cap US stocks, and municipal bonds. Hedges Are The Rage - Such As Gold, Bitcoin One of the first macro-developments that has caught my eye has been the continuing shift to alternative currencies. Yes, this can mean crypto, but I am also referring to the most time-tested realms like precious metals. Gold has been an area I have favored for the long term, including in 2024. This trade has been a fruitful one and has actually picked up steam recently. In fact, hedge funds have rushed into gold at a pace not seen in years: Net-Long Positioning in Gold (Managed Money Accounts) (Bloomberg)I am actually a bit surprised it has taken investors this long to catch-on to the trade. Inflation has been coming down for a while now and the Fed has paused rate hikes almost a year ago. This is a bullish backdrop for gold more broadly, and is central to why I recommended this asset class (again) back in April. It is worth pointing out that gold, sitting at just over $2400/ounce, has been on a tear this year. The metal's gain rivals the S&P 500, which is quite striking, and it was clear buying back in April would have been the correct move: Price of Gold (With Return vs. S&P 500) (CNBC)What I see here is an asset with momentum on its side and one that is getting additional love from professional money managers. This tells me the rally has legs and that is especially true since I believe the macro-backdrop is a favorable one. While other corners of the market - like Big Tech - are seeing some push-back and volatility, gold is proving it has merit to smooth out a portfolio's ride. The same is true with other assets that people can use as currencies. Take crypto as another example. This has also been a lower inflation / Fed rate cut play and Bitcoin (BTC) has more than doubled over the past year. Despite already strong gains, BTC has a short-term surge coinciding with some weakness in the S&P 500. This demonstrates the usefulness as an equity hedge continuing going forward: Price of Bitcoin (1-Year Return vs. S&P 500) (CNBC)Part of this has to do with the continued strength of (former) President Trump's polling. He has increasingly embraced the crypto industry, advocating for digital currencies to be \"made in the USA\", as reported by Yahoo Finance. The point here is not for me to advocate for a presidential candidate or to favor gold over BTC, or vice versa. But rather it is to show that both of these options have been used as equity hedges in the past, have a lot of momentum currently, and are starting to see big money moves in their favor. With the softening of the Tech sector in the last couple of weeks, I believe more investors will warm-up to these alternative currency options and that my followers can front-run this eventuality by remaining long - or adding to their positions - today. **I am long BTC and iShares Gold Trust (IAU). Small-Caps A Winner Of Domestic Growth Another rotational play that has captured some dollars that were formerly in large-cap Tech are their small-cap counterparts. The theme of this review is going to be momentum - and that is precisely what small-caps have going for them. A combination of resilient economic news, the prospect of Fed rate cuts, and some (dare I say) Trump-enthusiasm, have all sent investors scrambling into small-cap US stocks to benefit on the potential for economic success at home. Call volume for the sector has surged to record levels and continues to accelerate at the time of writing: Weekly Call Volume (Small-Caps) (Bloomberg)The logic here is relatively straightforward. Small-caps tend to be more economically sensitive to what is happening domestically. This is because their larger counterparts are more global and, thus, not as sensitive to the ins and outs of any one country. But it is more than that. Small-caps by nature tend to be more cyclical. Take the Vanguard Small Cap ETF (VB) as an example. Rather than being dominated by Tech, its largest sectors by weighting are Industrials, Consumer Discretionary, and Financials - all areas that need a healthy domestic economy to be successful:   VB's Sector Breakdown (Vanguard)Beyond just the cyclical nature of these sectors, there is another logical reason why this is a \"Fed rate cut\" play. This is related to the type of debt companies issue based on size. A lower rate environment - which investors are anticipating in the second half of the year - can disproportionately benefit smaller companies as they tend to hold more floating rate debt relative to larger companies that issue long-term bonds at fixed rates. As the interest rate environment declines, smaller companies can capitalize by lowering their debt costs in a much more meaningful way (by refinancing), all other things being equal. For a side-by-side comparison of debt structures, refer to the below chart: Debt Structure (Average Company in Russell 2000 vs. S&P 500) (BlackRock)Of course, this is just \"on average\". A \"small-cap\" company or a \"large-cap\" company can mean a lot of things. They are just as diverse in terms of sector, type of business, customers served, balance sheet management, and a host of other factors. So what is good for one \"small-cap\" company may not be good for another. It needs a more active management approach to identify winners or losers, and that is why I continue to favor diversified ETFs as a way to play this space from a risk management perspective. Finally, there is plenty of room for small-caps to make-up against their larger peers. Sure, this rally has been going on a while and the herd is moving into it rapidly. That can limit forward gains. But remember that large-caps have been dominating for a long time. Perhaps too long for those who can about historical trends. As the following graphic illustrates, small-caps have handed investors a handsome return, but one that is much lower than what large firms delivered: Index Returns (S&P Global)The conclusion I draw here is that any rotation into small-caps that has already occurred is probably not the end all. There is plenty of room for catch-up, as long as economic conditions favor this theme. With Fed rate cuts looming (potentially beginning in September) and economic news out of America generally positive, the market is supportive of these domestically-oriented and smaller names. **I am long the Vanguard Small Cap ETF. Muni Bonds: For The High-Income/High Taxed My final sector idea is municipal bonds. My readers know this is not a \"new\" one for me and as a high-income individual investor these securities have provided a stabilizing force in my portfolio over time. Similar to the other ideas like gold and small-caps, munis have also been a favorite of the market lately. Flows into the sector have been positive - and growing - over the past month, and that is a welcome sign for those who already had exposure to them: Weekly Flows (muni bonds) (Yahoo Finance)This is where a similar theme plays out: the market is rotating into munis in a big way, and I don't see that changing. The inflation/Fed story is broadly beneficial for fixed-income securities, and I believe that will be a tailwind for munis in the second half of the year. But I will reiterate that this is most beneficial for those in high tax brackets. This could be because of income levels or due to residing in higher tax jurisdictions. But the point is that those who really want to own muni bonds are those who have a high tax burden for any reason. The tax-exempt nature of these issues is what drives up the after-tax yield - assuming you have significant tax savings to gain. For those with a lower income and/or tax burden, the after-tax impact is minimized, so keep that in mind when evaluating whether or not this is right for you. To understand why this is important, let us look at the average yield of a muni bond right now. On a historical basis, the yields are quite high on an absolute level. This is certainly true for those in the highest of tax brackets. Once tax savings are considered, yields are near the peak of the last two decades: Tax-Equivalent Yield (Average Muni Bond) (Charles Schwab)This suggests plenty of value at hand for this sector. Again, the value is not equal for every investor. It depends on just how much of these tax savings you as an individual can capture. But it does show that current yields are well above inflation levels and beat other short-term plays like treasuries or certificates of deposit. With this backdrop and the rotation into the sector, I will continue to amplify my net-long position. **I own shares of the Nuveen Municipal High Income Opportunity Fund (NMZ) and also a number of individual issues from the state of North Carolina (where I reside). Bottom-line The market has seen some hiccups of late, but it hasn't been an \"across the board\" sell-off. The Tech-heavy S&P 500 and NASDAQ 100 indices have seen a pullback (roughly 4-5% drop) but other corners of the market are thriving. These include metals, crypto, small-caps, and munis, among other sectors as well. What this suggests to me is not to flee large-cap US stocks - on the contrary, I will remain very long in that sector. But it does open up the possibility to diversify one's portfolio while also gaining \"alpha\" through these momentum plays.  In this review, I touched on a few themes that have been working and that I believe will continue. I hope readers use this as food for thought as they position themselves for what could be an interesting second half of 2024.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2454540882"}