Would you believe the NASDAQ is positive in 2020?

Michael Smith

Kauri Asset Management

A look back at the NASDAQ

Not to be overshadowed by the larger New York Stock Exchange (NYSE), the NASDAQ is the world’s second-largest stock exchange based on market capitalisation. Established in 1971, its full name, the National Association of Securities Dealers Automated Quotations System, alludes to its standing as a fully-electronic trading exchange.

Nowadays, with more than 3,000 companies listed on the NASDAQ worth over $10 trillion, the exchange handles the highest trading volumes across all US markets. The NASDAQ Composite Index is the main benchmark used to track the exchange, incorporating a market-capitalization-weighted index of all the stocks traded on the NASDAQ stock exchange.

The index has seen significant growth over the years, however, it hasn’t always been smooth sailing. On March 10, 2000, the NASDAQ Composite reached a high of 5,132.52, before falling by as much as 78% in the 30 months thereafter following the impact of the dot-com bust and 9/11.

It would be another 15 years before the index reclaimed its old high. Since 2015, however, the NASDAQ has outperformed both the Dow Jones Industrial Average and S&P 500, climbing 77% across the last five years versus returns of 29% and 34.7% respectively. Furthermore, since COVID-19, the NASDAQ has led the charge, such that it is now back in positive territory for 2020!

The familiar faces of the NASDAQ

Most stocks from the technology sector are listed on the NASDAQ, which has made it an increasingly popular index in recent years due to the fact technology has continued to underpin various advancements across society. The index also crosses over into subsectors including the likes of biotechnology, semiconductors, software, plus some financial, consumer and industrial stocks.

Apart from its sophistication as a fully-electronic exchange, one of the reasons so many technology companies list on the NASDAQ is due to it being a more accessible market. It means many smaller-cap stocks contribute towards making up this index. As such, the NASDAQ Composite Index gives a broader cross-representation that tracks large and small firms, unlike its peers the Dow Jones and S&P 500, which focus exclusively on large-cap stocks.

Some of the leading stocks that make up the NASDAQ include: Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), Apple (APPL), Adobe (ADBE), Facebook (FB), Cisco (CSCO), Tesla (TSLA), Intel (INTC), Netflix (NFLX) and Gilead Sciences (GILD).

What’s driving the NASDAQ?

Due to the composition of the NASDAQ, it is little surprise that its rally has been sparked by big tech companies proving largely resilient to the economic shock arising from COVID-19.

If we consider the likes of the high-profile technology names mentioned above, who all boast solid balance sheets, the transition towards remote workplaces, online shopping, video communications and streaming, as well as cloud computing stand as potential tailwinds for these companies, rather than headwinds. Even though the economy has been hit hard, people have still been dependent upon the products and services offered by big tech to go about their day-to-day lives.

From their recent lows, Apple is up nearly 40%, Microsoft is up more than 35%, Alphabet is up around 30%, while Amazon has gained over 40%. In fact, Amazon has posted a new all-time high, whereas Apple and Microsoft are within touching distance of their own records and Alphabet is closing in on a US$1 trillion market cap. The top 10 companies on this index account for around 44% of its entire value, and with this group up about 12% year-to-date on average, the NASDAQ is quickly paring its losses.

What role can technology play coming out of the recession?

Looking ahead, we foresee technology being pivotal to a rebound in the US economy and economies all around the world for that matter. This also touches on another point, the sheer scale and size of big tech companies, with operations across every corner of the globe, mean they are robust businesses that are leveraged to various demand cycles.

The NASDAQ, also being home to a high number of biotechnology companies, is leveraged to the upside of a potential COVID-19 vaccine, with certain companies in this space already conducting clinical trials and releasing promising early-stage updates. As this will be a fundamental component for the long-term stability of the economy, NASDAQ tech is once again front and centre.

Meanwhile, we expect cloud computing to play an even greater role as businesses fast-track their transition to support an environment where employees are more likely to have flexibility as to whether they work from home. For communications solutions providers, this also means the need for products that keep channels open and allow businesses to continue operating efficiently.

It’s also likely in a recovery phase we will see a greater emphasis on business efficiencies and streamlining. This is an area that technology has long held an important role as far as facilitating innovation that allows companies to improve their operations.

Transaction and payments processing is an area we’ve touched on previously, with behavioural changes likely to see consumers embrace digital solutions, introducing the prospect of future innovation in this area. Once consumers get used to a certain way of doing things, as they have been forced to do amid the current circumstances, their habits are less likely to change moving forward.

Ultimately, the very premise of an economic rebound fuelled by tech companies focuses on their agility and responsiveness that allows them to navigate an uncertain and (likely) rocky recovery. Innovation is the lifeblood of economic growth and we believe this pandemic will necessitate a suite of technological products and services much sooner than the world could have ever imagined.

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Michael Smith
Managing Partner
Kauri Asset Management

With over 15 years of experience within the financial services industry, Mike possesses an outstanding acumen and extensive insight when it comes to global equity markets and a range of financial services products.

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