If anything, the increased volatility we saw this quarter seemed a little more in-line with the times. Whether it’s the pandemic, politics, or the state of the economy, there are certainly more questions than answers. And given we’d just come off one of the best quarters for the markets in history, it’s understandable investors looked to lock in profits at any sign of trouble. With the election looming, and continued gridlock in Washington, we will likely see this volatility hang around for some time. That said, getting caught up in the day-to-day action in times like these often yields little more than a headache. Markets have proven they go up over time, but never in a straight line.

The technology sector, in particular, was dealt a number of punches this quarter. I found a couple of interesting things going on worth mentioning. The first has to do with the technology sector’s performance year-to-date. These are the companies that saw little impact from the pandemic, or in some cases, even benefited from it. Unsurprisingly, investors were quick to put new money to work in this area as the dust began to settle back in March. From that point on, anything with exposure to the cloud, remote work, eCommerce, etc. took off and never looked back. So, when the general level of uncertainty began to rise in recent weeks, this was a pretty easy place to look for people who wanted to take some money off the table. While there are some companies in this group that may have gotten more credit than they deserved in the broader rally, this was, for most, a healthy correction. Many of the pre-pandemic tailwinds that existed for companies like Amazon, Apple, Microsoft, etc. have only strengthened and are likely to continue for the foreseeable future.

Another interesting dynamic we saw this quarter was the issuance of several high-profile IPOs. More than a few private companies looked to capitalize on investors’ appetite for all things technology by issuing their shares to the public. As it turns out, it looks like they were right to do so. Snowflake (the largest cloud IPO to date) and other similar businesses saw their shares increase dramatically in the first several days of trading, sometimes even doubling out of the gate. While average investors typically don’t have access to these hot IPOs, this becomes interesting for the broader sector once you consider who was investing in those companies and where the money came from.

Banks advising these companies first allocate the shares to their best and biggest clients (e.g., mutual funds, hedge funds, extremely wealthy individuals, etc.). When these clients are given allocations, it’s often the case they have to sell something to raise the cash needed to buy the new stock. Many will then turn to companies in similar sectors where they currently have large gains, and who are big enough to absorb their selling without drastically impacting the price. However, when you have a bunch of funds doing this all at once, it can put downward pressure on these stocks regardless. Given the setup mentioned earlier, this likely added to selling pressure on large-cap tech stocks who had been so strong over the past several months. However, the good thing is that once many of these big funds have made their money in an IPO like Snowflake, they often go back to many of the highest quality companies they shouldn’t have sold in the first place.

All in all, there was a lot was going on this quarter and it can be hard to get your head around the many opposing forces at work each day. And most likely, in a few months when I sit down to write the recap for the fourth quarter, there will be a whole new set of factors to consider that we didn’t see coming. With that said, I’ll leave you with a reminder of our philosophy of finding great companies for the long run that can outlive the notoriously fickle market sentiment and ever-changing macro conditions.