Technology Stocks: Should You Bail?

As tech meltdowns go, the recent one is tame. Still, we think a couple of tech titans may be worth buying now.

- John Waggoner

If you’re starting to suspect that intermittent meltdowns are an inescapable feature of investing in technology stocks, you’re correct. The tech rout that began in August 2018 is just the most recent example. Tech investors want to know what caused the latest tech short-circuit and whether there are any bargains among the ruins. But you should also be asking whether you’ve got the fortitude to invest in such a volatile sector.

New technology has always revolutionized American life, and tech stocks have always been a part of that revolution. Railroad stocks dominated the 19th-century stock market; RCA, known to traders as Radio, was a lion of the Roaring Twenties. Polaroid dominated the Go-Go Years of the 1960s, and Microsoft and Apple soared in the 1990s, along with a spate of dubious internet stocks, such as Pets.com.

Facebook, Apple, Amazon .com, Netflix and Google’s parent, Alphabet—the FAANG stocks—have been the darlings of the most recent bull market. All five represent revolutionary advances: Facebook in social media, Apple in hardware, Amazon in retailing, Netflix in entertainment and Google in internet search and online ads. From the start of 2018 until they peaked later in the year, the FAANG stocks gained an average of 55% (not including dividends). Netflix, up 118.3%, led the pack.

Most big tech rallies end badly. The most notable comeuppance was the tech wreck of 2000 to 2002. The technology-laden Nasdaq 100 tumbled 78.2% from January 14, 2000, to October 9, 2002, while Standard & Poor’s 500stock index fell 47.0%, not including dividends. This time around, the Nasdaq 100 has fallen 13.7% from its August 29 high, compared with 9.6% for the S&P 500. The FAANGs have fared worse, as the table on the next page shows. (Prices and returns in this story are through December 7.)