Uncategorized, Weekly Update

First Half 2018 Dominated by Tech


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Published July 20, 2018

timingcube_cartoon072018

Through the first half of the year, only three sectors outperformed the broad market – technology, consumer, and energy.

Chart 1: Tech and consumer drive the market’s returns – returns shown relative to the S&P 500

Tech and consumer drive the market’s returns – returns shown relative to the S&P 500

Energy accounts for a paltry 6% of the overall S&P 500 whereas technology (26%) and consumer discretionary (13%) have an almost 40% weighting.

Chart 2: Sector weighting of the S&P 500

Sector weighting of the S&P 500

As a result, only two of those sectors really drove the overall market’s slim gains – technology and consumer cyclicals (aka consumer discretionary – e.g. retailers, restaurants, et al).

Chart 3: Tech is responsible for almost ALL of the market’s first half 2018 gain

Tech is responsible for almost ALL of the market’s first half 2018 gain

Peeling this back a little further, we see that the handful of dominant companies known as FAANG contributed more than the overall market return. The other 495 companies in the S&P 500 delivered a return just below 0%. FAANG is comprised of: Facebook, Apple, Amazon, Netflix, and Alphabet(Google).

Chart 4: FAANG rules the market

FAANG rules the market

The surprise in the market so far this year has been the relative underperformance of financial stocks. Rising interest rates produce better profit margins for banks, which should bolster the financial sector. However, the rise in rates, while sharp for short-term rates like 2-year and less, has not extended into a big move in longer-term interest rates – e.g. 10-years and beyond. As a result, the yield curve has flattened and the expansion of profit margins for banks has not really panned out so much. Also, financial stocks were big winners in 2017. So maybe the market just got ahead of the expanding profit margin idea. After posting gains in January, financial stocks have DROPPED every month since so far in 2018, posting a -4% loss through the first half of the year.

The other major impact on stocks January through June has been the ongoing global trade tariff argument. This has led investors to shun international stocks in favor of domestic stocks. It has also pushed smaller, domestically-focused company shares higher at the expense of larger globally-driven companies, like large industrial and material companies, both of which were notable losers so far in 2018.

Chart 5: The impact of trade chatter

The impact of trade chatter

Thankfully, our focus Nasdaq 100 index (QQQ) continues to be a recipient of good cheer with the above-mentioned FAANG stocks comprising almost 40% of that index and helping us to enjoy a solid first half of 2018.


Market Comments

On Monday, the somewhat surreal Trump-Putin press conference in Helsinki overshadowed almost all other news. Still, stocks closed modestly higher, however Netflix shocked investors reporting slower subscriber growth and oil prices fell 4%.

Tuesday, the stock market overcame its Netflix fears and FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) rallied. This pushed the NASDAQ 100 from a -1.1% intraday loss to a 0.6% gain by the close. Federal Reserve chair Powell in his statements before the Senate Banking Committee reiterated his desire to gradually keep hiking interest rates.

On Wednesday, stocks moved modestly higher on bullish growth figures from the Federal Reserve’s Beige book readings that indicate a US economy that is growing but is constrained by shortages of skilled workers and the threat of higher materials costs. Of note, housing starts in June dropped by 12.3% from lowered numbers in May and were 3% lower than year-ago levels – negative housing start figures have historically been a leading indicator of recessions.

Thursday, stocks closed weaker, breaking a five-session win streak, with the S&P500 conceding 0.4%. A number of bellwether stocks weakened on earnings and earnings guidance including American Express (AXP), Ebay (EBAY), Philip Morris (MO), and Alcoa (AA) which fell a stunning 13.3%. President Trump blasted Fed chair Powell in a recorded interview expressing his distaste for more interest rate hikes.

Trump shook things up a bit Friday before the markets opened threatening to levy tariffs on $500 billion of Chinese imports. Stock futures dipped briefly but the major indices started drifting up from the opening bell and then faded in the afternoon to close slightly negative for the day.

As a final note, the S&P500 has been, despite the tariffs and the trade war rhetoric, slowly attempting to regain its all time high (2,872.87) set this past January, coming within 3% of it this week.

For the week, the major indices were essentially flat with the S&P500 (SPY) up 0.03% and the NASDAQ (QQQ) down -0.35%. Small caps (IWM) closed the week up 0.63%.

Warm wishes and until next week.