Herd mentality is alive and well in our markets given that the US tech sector is running rampant – up over 38% this year. This is also evident in the Australian tech sector – up around 28%. When we compare this to the broader market, the rise in the Australian tech sector is three times better than the next best sector, with Communication Services up around 9%.
Blindly following the trends in the US market and applying this to the Australian market is concerning for two reasons. The first is that the US technology sector has the biggest stocks in the world that benefit from worldwide exposure to their products and services like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Nvidia and the list goes on. The same cannot be said for Australian tech stocks which are dwarfed in size by their US counterparts.
The second concern is that the US technology sector accounts for around 28% of the S&P500 making it the largest sector in the US. The story is vastly different in Australia, as our tech sector makes up less than 4% of the All Ordinaries Index, which means it is the ninth largest sector, and only marginally above Energy and Utilities. The biggest sectors in the Australian market include Financials with a weighting of over 25%, while Materials is around 24%.
So why does this matter?
The S&P 500 has risen over 13% this year, while the Dow Jones is up just under 3%. The Australian market, on the other hand, is up just over 1%. This suggests that the rise in the US market is being driven by a few tech stocks rather than the broader market, which is concerning.
I say this because Materials and Financials are not really driving the Australian market at present, which means the rise is being driven by the broader market making the move more sustainable, unlike the US market. As technology stocks have become increasingly overheated in the US, it is possible the bubble will burst sometime in the future.
This presents considerable risk for those Australian’s suffering from FOMO and following the herd mentality, particularly if they’re not on the ball and watching their stocks closely.
While I’m not suggesting the US tech sector will crash in the short term, what we know is that the more bullish the rise, the more people will buy into tech stocks until eventually the crash occurs.
Based on historical trends, a crash in the US tech sector will see the same occur in Australia, and while this will have a significant impact on the S&P500, the same cannot be said for the Australian market.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au