Innovation in turbulent times

Growth and innovation often occur in turbulent times. By applying equal parts brainpower, ingenuity and guts, innovators are able to create sustainable, global brands that totally disrupt the status quo. It may be difficult to even consider the future of investing at this moment in history, however consider this – we don’t know what big ideas are brewing right now. We’ll likely find that the companies prioritizing innovation now are the ones trading on NASDAQ well into the future.

When COVID-19 became global news, market volatility soared in response. From February 19th through March 25th, the CBOE VIX Index (which measures market expectations of near-term volatility) surged from 14 to 82, a level not seen since the Great Financial Crisis. This jump in volatility corresponded with a record setting downward movement in equities. In the same period the S&P 500 Index dropped 26%, with the Dow down 27% and the NASDAQ 100 down 23%.

Recently, the NASDAQ 100 turned higher for the year, while the S&P 500 and the Dow Jones Industrial indexes are still struggling down 9% and 14% respectively. The composition of the indexes is a major determinant of their performance. At any given time in an economic and market cycle, different companies’ products and services are valued differently by investors. Companies that are innovating new products and services at a faster rate are being more highly valued by investors now.

The Nasdaq-100 Index is comprised of 100 of the largest companies (ex-financials) listed on the Nasdaq exchange. The index provides significant exposure, over 80% of the weight of Nasdaq 100’s underlying holdings, to growth sectors – namely, Information Technology, Communication Services and Consumer Discretionary. The companies within these sectors are highly innovative, as exhibited by their commitment to substantial Research & Development spending which enables them to be at the forefront of emerging long-term themes such as 3D Graphics, Cloud Computing and Virtual Reality. The divergence of the NASDAQ 100 index performance from the S&P 500 and the Dow reflect the way investors are viewing the “new” economy likely to emerge from the coronavirus pandemic.

Innovative companies are often born in difficult economic times, necessity being the mother of invention. A 2009 study sponsored by the Kauffman Foundation found that more than half of the (then) current Fortune 500 companies were launched during a recession or bear market. Ask any entrepreneur – there is nothing like the prospect of imminent disaster to focus the mind. Suddenly, the impossible becomes not just possible, but essential. Microsoft, Netflix, Tesla and Apple are companies that were born from innovation and are now iconic American brands listed on the Nasdaq exchange. The NASDAQ 100 may provide investors with a blueprint of the economy that will emerge from the current crisis and allow some educated predictions as to what might happen next.

There will be some winners. As referenced in a prior post, technology is sure to be a winner. The expected strong demand for technology products and services, combined with the prodigious cash flows generated by these businesses, will continue to fund critical research and development. As it did after the global financial crisis, the tech industry could help lead us out of this virus-induced funk.

There will be some losers. We all know which industries are taking it on the chin. However, within any industry the companies most at risk are those with considerable debt and a diminished capacity for further borrowing. Those that will survive are sure to be those that can innovate.

Brad Lyons, CFP®, Portfolio and Planning Support Advisor

Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.