A funny thing has happened to the NASDAQ 100 and the Invesco QQQ Trust (NASDAQ:QQQ), the exchange-traded fund which tracks that index. QQQ stock is falling behind.
Admittedly, “falling behind” might be a bit hyperbolic. Investors in QQQ stock still have seen total returns over 3% so far in 2021. In a still-roaring market, it’s easy to forget that those gains — about 15% annualized — are far better than long-term averages.
That said, QQQ certainly has lagged. Year-to-date stock price appreciation of 3.45% is below that of the 4.23% for the broader NASDAQ Composite.
More surprisingly, the S&P 500 and the Dow Jones Industrial Average have done significantly better, with YTD rallies over 7% and 8%, respectively.
This is a big departure.
It’s been tech that’s led the market’s huge rally off 2009 lows. The NASDAQ Composite includes more tech companies, while the NASDAQ 100 is heavily weighted toward the ‘Big Tech’ companies on the NASDAQ Exchange. So, at least so far in 2021, broad index performance suggests something of a rotation out of tech and growth into other sectors and value.
The huge question for QQQ stock — and for the market as a whole — is: will that rotation hold? I don’t believe it will.
The Changing Trend in QQQ Stock
For years, tech has dominated. Even with underperformance in 2021, over any traditional multi-year benchmark — 3-year, 5-year, 10-year — the NASDAQ Composite has led other major indices, and the NASDAQ 100 has done even better.
In fact, over 5- and 10-year periods, returns in QQQ stock have been more than double those of the S&P 500 or the DJIA. And that’s despite the fact that both of those indices themselves include tech stocks. Apple (NASDAQ:AAPL), for instance, joined the Dow Jones back in 2015.
Obviously, that’s changed in 2021, for two core reasons.
First, stocks outside of tech have done better. Energy and retail, in particular, have been hot. The Energy Select Sector SPDR Fund (NYSEARCA:XLE) has rallied 33% YTD. The SPDR S&P Retail ETF (NYSEARCA:XRT) is up 39%.
QQQ stock has little exposure to either sector. The two biggest traditional U.S. retailers in the NASDAQ 100 are Ross Stores (NASDAQ:ROSS) and Lululemon Athletica (NASDAQ:LULU). Combined, those stocks comprise less than 1% of the ETF, and both stocks have bucked their sector’s trend and declined so far in 2020. QQQ has essentially zero exposure to energy.
Second, some of the same stocks that have led the outperformance of QQQ stock since 2009 have lagged. Apple and Amazon.com (NASDAQ:AMZN) combined comprise 21% of the index; both stocks are in the red this year. Tesla (NASDAQ:TSLA), with a 4.5% weighting, has sold off as well.
The Rotation From Growth to Value
There’s a story to tell in which the QQQ’s underperformance is the beginning of a trend.
After all, tech has become awfully expensive. AMZN, for instance, has traded flat for months yet still is valued at nearly 50x next year’s earnings. Higher interest rates may have helped bring
Meanwhile, sell-offs elsewhere in the market created value. Energy stocks were hammered by lower crude prices in 2020, a year which saw oil futures incredibly (and briefly) turn negative. Lockdowns driven by the novel coronavirus pandemic crushed retail revenues and stock prices. Now, with normalcy returning, both sectors are set for a recovery.
Put simply, tech got too expensive. Non-tech got too cheap. Indices that favor the latter — the S&P 500 and the DJIA — will prosper as performance reverses.
This essentially is the rotation from growth to value that’s been awaited for years. If it’s indeed arrived, it’s not going to be a story that lasts for just a few months.
But there’s another story to tell that suggests the QQQ’s underperformance is just a pause. That’s the story I’d be more inclined to believe.
In this scenario, the moves into sectors like energy and retail aren’t being driven by long-term investors who see underpriced equities. They’re being driven by a short-term focus on the “reopening trade” that will in fact dissipate once normalcy returns.
After all, offline retail was struggling massively before the pandemic arrived. The same structural problems that existed in 2019 — the rise of e-commerce, lower mall traffic, the millennial generation’s preference for experiences over possessions — will still exist in 2022.
And are we really going to trust exploration and production companies, in particular? We’re to believe that U.S. shale companies won’t overdrill — and this time, they mean it?
Meanwhile, the same growth drivers for ‘Big Tech’, in particular, similarly exist. All the trends that got growth investors excited — artificial intelligence, autonomous and electric vehicles, etc. etc. — remain intact. The massive benefits of scale in tech aren’t going anywhere.
Perhaps some valuations got out of hand. To my eye, TSLA still looks overvalued even down 26% from its highs.
But broadly speaking, QQQ still provides ownership of the best tech companies in the world. More specifically, it provides ownership of the best companies, period.
Over time, that’s what is going to matter. A return to normalcy isn’t going to suddenly make cruise stocks, for instance, return to 2019 highs. It will refocus the market on why they sent Amazon and Alphabet and Apple to $1 trillion-plus valuations in the first place.
In other words, once the focus on the return to normalcy in the economy ends, the return to normalcy in the market will begin. And then I expect QQQ stock to get back to its old ways.
On the date of publication, Vince Martin held a long position in AMZN.