Monthly Brief June 2018 – S&P 500 Index and the Information Technology Sector
Throughout June, the tone of market discussions continued to move from 2017’s optimism to one of apprehension on the back of global trade concerns. Globally, June provided modestly positive returns for US and UK equity investors, while broader European and Asian markets generally saw declines. While the actual impact of current trade-related actions has had minimal economic effects to date, the outstanding pledges of additional tariff increases have left investors concerned about where the breaking point may lie.
Reflecting this growing uncertainty was the pullback in the yield of the ten-year US Treasury Note. Beginning in late 2017 rates moved generally higher, topping out at 3.11% in mid-May, but have now retreated back below 2.90%. Interest rates typically react to expectations around economic strength and inflation and this modest pullback may very well reflect rising concerns that global trade disruptions are likely to slow global growth.
While this environment is certainly not ideal, it’s important to differentiate between the near-term effects (risks) to the global economy versus the impact on capital markets. To date, concerns primarily focus on slowing rates of economic growth due to trade disruption, but still growing and not yet to the point of contraction (i.e. not recessionary). However, within the capital markets, slowing growth calls into question future values, even if earnings continue to show positive growth, and can result in declining asset prices. It is this dynamic that has caused recent challenges in the global markets.
CHART OF INTEREST – S&P 500 INDEX AND THE INFORMATION TECHNOLOGY SECTOR
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.
While the sector has been the strongest contributor within the index year to date, June saw it lag the broader market. Given the sector’s prominence, could this be a sign of trouble? The accompanying chart looks at the trend of the sector relative to the broader index and plots the ratio of the two. Accordingly, a rising trend represents a period of leadership for the sector. Since late 2016, the sector has demonstrated this leadership, but not without a measure of volatility.
In this context, the prevailing trend looks to continue to be in place and the recent underperformance is not out of line with previously experienced volatility. This suggests that June’s experience is not out of the ordinary and not necessarily indicative of a breakdown in the sector’s leadership. But this is certainly an item to watch, as 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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