Monthly Brief October 2018 – S&P 500 Index and the Information Technology Sector: Part 2

Monthly Brief October 2018 – S&P 500 Index and the Information Technology Sector: Part 2


This year, the month of October certainly lived up to its reputation of being one of the most volatile months of the year. Nearly every major US and international equity index registered a monthly decline on the back of continued global political concerns and questions as to how the global economy might respond. Existing uncertainties range from trade policy to the upcoming election in the US, while other issues again flared up including the health of the Chinese economy and the state of unity within the eurozone.

A common investment thread in each of these issues has been the difficulty of predicting outcomes and the ensuing potential impacts on economic and capital market conditions. And for investors, this uncertainty represents true risk.

Prior to October, equity market stress had existed outside the US with many developed and emerging international markets already in decline, unable to move higher even with many signs of continued global economic growth. The US remained a bright spot, despite the contentious environment leading up to the mid-term elections. But, finally the US equity markets gave in, joining the global decline, even in the midst of a healthy earnings season.

This further serves to confirm the appropriate focus of investors on key events in November, particularly the mid-term elections and a late November meeting scheduled for US and Chinese leadership, which is expected to focus on trade policy. As these events are weighed against global economic strength, investors’ judgment of the outcome will likely be an important catalyst for the next leg in global equity markets.

The declines in October have certainly left investors wondering “What’s next?” As we assess the probabilities of a market rebound versus further declines, no single data point can provide the answer. Rather, understanding requires a breadth of information to help develop probabilities of the next move in the global capital markets.

One helpful piece of information is understanding how areas of market leadership are faring. In June we wrote:

“The current makeup of the S&P 500 Index’s Information Technology sector includes many high-profile companies. Not only are these household names, they also represent significant contributors to today’s global economy. As of June 30, the sector represented over 25% of the index and four companies, Apple, Microsoft, Facebook and Alphabet (Google), accounted for nearly half of this. So it stands to reason that this sector’s health will have a large say in how the broader market performs.”

Taking an updated look at the Information Technology sector’s recent performance paints a different picture of the market’s health. Following October’s decline in the S&P 500 Index of over 6%, the leadership exhibited by the Information Technology sector has begun to break down. The accompanying update of the chart used in the June 2018 Monthly Brief shows the performance of the Information Technology sector relative to the broader S&P 500 Index having broken out to the downside of its longstanding trading channel.

While this alone is not enough evidence to suggest further market stress is imminent, as we said in June:

“… extended underperformance by the sector could be a sign of more difficult times for the equity markets in general.”

James Ferrin, CFA
Chief Investment Officer


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