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Stocks have been wild lately. Here’s how to protect your portfolio

Some experts have been warning for a while that the spectacular run for top tech stocks — one that has lifted the Nasdaq and S&P 500 over the past few years — would have to end eventually.
And now, the investors who have been better able to stomach the wild gyrations in the tech sector are those who have moved into less flashy sectors like oil stocks and banks.

“If you’ve invested mainly in the S&P 500 or tech stocks for the past few years you did great,” said Tony Molina, senior product specialist with Wealthfront.

But the so-called FAANGs -—Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google owner Alphabet (GOOGL)) as well as Microsoft (MSFT) and Elon Musk’s Tesla (TSLA) — can’t keep leading the broader market indefinitely.

And they “show that true diversification isn’t just the S&P 500,” Molina said.

Tech lags, while oil stocks and banks surge

So far this year, it looks like investors are indeed focusing on a sector rotation, switching their investments from one area to another. The S&P Technology (XLK) sector exchange-traded fund is flat in 2021 — and Alphabet and Microsoft are the only of the S&P’s seven leading techs in positive territory this year.
Meanwhile, the S&P Financial (XLF) sector ETF is up 18% — in part due to expectations that rising long-term bond yields will boost profits. And the S&P Energy (XLE) ETF has soared a whopping 42% thanks to a surge in crude oil prices.
Oil giant Chevron (CVX), a new Warren Buffett stock pick, is the top Dow performer this year, just ahead of Wall Street powerhouse Goldman Sachs (GS). Both have surged more than 30%. American Express (AXP) and JPMorgan Chase (JPM) are among the Dow leaders for 2021, too.
Elon Musk lost $27 billion last week
By contrast, software giant Salesforce (CRM) and Apple, down about 5% and 10% respectively, are on the Dow’s laggards list.

But tech’s underperformance isn’t necessarily a bad thing, experts say.

“The last few weeks for the market have been fascinating,” said Jake Wujastyk, founding member and chief market analyst of TrendSpider. “It’s been a long time since we’ve had such a sell-off in growth stocks but the broader indexes haven’t been affected.”

His conclusion: “It shows that diversification is crucial.”

Consumers are shopping — and retail stocks are soaring

The weakness in many of the FAANGs may be due more to improving fundamentals for the broader economy — thanks to widening vaccine availability, more federal stimulus and the reopening of many retailers and other consumer services.

Plus, the recent rise in bond yields aren’t helping tech. Rising rates could make it more expensive for tech companies to borrow money in order to keep growing at such a rapid clip.

“What’s inflation going to do? That question is why we are seeing such tension in the market,” said Peter Cramer, head of insurance portfolio management and trading with SLC Management.

How to invest in America's nearly $2 trillion shot in the arm

“So much of the bull narrative for tech is based on the assumption that low rates incentivize companies to borrow and fuel more growth. That is the concern with tech stocks,” he added.

Investors realize this, and they’re continuing to bet on America’s broader economic recovery.
For example, the S&P Retail ETF (XRT) has soared nearly 50% this year. While a big part of this gain is due to the fact that meme stock wunderkind GameStop (GME) is in the fund, other top holdings — such as jeweler Signet (SIG), Children’s Place (PLCE) and shoe retailer Designer Brands (DBI) — have soared as well.

“We’re starting to see the economy reopen. Fundamentals are improving and there is this injection of stimulus,” Cramer said.

This year’s market moves are also reminding investors that it’s a good idea to have a portfolio that includes a good mix of both domestic and international stocks as well as fixed income assets.

“Diversification is important outside of just whether to own more value or growth stocks,” Wealthfront’s Molina said. “You still need exposure to emerging markets and other foreign markets as well as municipal bonds.”

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