Warning signs in today’s tech sector are reminiscent of the dotcom boom of the late 1990s that eventually went bust, market veteran Jim Paulsen told CNBC on Friday.
“What I find interesting, is that there’s been significant narrowing of participation in the S&P 500 as these FANG stocks have really taken over,” Paulsen said on “Squawk on the Street.”
Jim Cramer, host of CNBC’s “Mad Money,” in 2013 popularized the term FANG, which stands for shares of Facebook, Amazon, Netflix, and Google, now part of Alphabet. More recently, another “A” was added to FAANG, representing Apple, and there’s been talk about how to incorporate an “M” for Microsoft.
Excluding tech stocks, the rest of the S&P has consistently since 2013 been underperforming, compared with the overall market, Paulsen said.
“You could argue the contemporary fascination with technology stocks has just completed an entire dotcom cycle,” Paulsen wrote in note to clients. “That is, for five years, tech has dominated the S&P marketplace which is surprisingly close to how long tech dominated during the dotcom run in the 1990s.”
“I just wonder if it might end similarly,” Paulsen told CNBC Friday. “Not to the same magnitude, but similarly.”
The “dotcom bubble” from about 1995 to 2000, was a time of rapid grow in the equity market fueled by internet company investments. The bottom fell out in March 2000, which saw the Nasdaq, a index of with lots of tech stocks, lose nearly 80 percent of its value by October 2002.
Larry Haverty, managing director at LIH Investment Advisors, said there are “a lot of warning signs” in the market right now, such as increased regulatory scrutiny in the tech sector.
“Eventually the law of large numbers is going to get [the FANG stocks],” Haverty said on “Squawk on the Street.” “With Amazon, I think the demon is antitrust.”
But Paulsen pointed out a clear distinction between today’s technology sector and the 1990s is the Russell 2000. Within the small-cap index, he said, tech stocks are matching overall market performance, “rather than significantly outperforming it.”
He added, “Unlike the dotcom in the late 90s, where both small-cap and large-cap stocks were far outperforming the average stock, that’s not happening in the small cap universe.”
If investors want to maintain a technology weight in their portfolios, Paulsen said, “Do it in small- and mid-cap stocks as opposed to the popular FAANG names.”