Interest rates on cash and bond yields have been close to zero and anyone seeking yield [growth] on their savings has looked at the dividends being paid on shares and moved their money into equities.
The 10-year Bull Run on equities may have made investors complacent but the events of ‘Red October’ might cause some investors to re-evaluate their positions. The S & P 500 fell by around 9% last month. Is this the beginning of a bear market or simply a small correction?
The S & P 500 accounts for almost half of the world’s stock markets by value.
On 20 February 2009, the Index closed at 770.05. By 3 October 2018 the index had risen to 2,925.51. That represents growth of 300%.
The dependence of the S& P on tech stocks, collectively known as FAANGs [Facebook, Apple, Amazon, Netflix, and Google] continues to rise and accounted for more than half total growth in 2018.
The G in FAANG is not referring to Google but rather Google’s parent company Alphabet Inc.
The past 10 years has been a good time to be a tech stock but can it continue?
Low interest rates allowed IT firms access to cheap money used to buy out competitors and start-ups.
The lack of regulation of IT firms facilitated higher profits by allowing them to gather huge amounts of personal information on ordinary people and sell that information unhindered to advertisers.
That behaviour will probably be significantly curtailed in future with implementation of the EU’s General Data Protection Regulations [GDPR] likely to be followed in time by other countries.
The inability of countries to properly tax their activities has been a significant factor in the growth of IT firms. Super profits are being eyed enviously by Governments, especially in Europe.
The recent UK Budget imposed a 2% tax on online transactions and this is the first shot in the war.
The EU has proposals for a similar 3% tax but is awaiting agreement between all Eurozone countries.
With US interest rates at 2%, cash might now be an alternative.