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The technology sector is back on the upswing after taking a breather earlier this year. Money Talk’s Greg Bonnell discusses the outlook for the technology sector and the broader market with Benjamin Gossack, managing director and portfolio manager at TD Asset Management.
Transcript
Greg Bonnell – Big technology stocks always get a lot of attention and are seen by many as market leaders, but they’ve actually been in the lurch in their sector for a while. But our guest today says big technology stocks are making a comeback. To discuss that and other trends we’re watching, we’re joined by Ben Gossack, managing director and portfolio manager at TD Asset Management. Ben, thanks for having me on the show again.
Benjamin Gossack – Welcome back to the show. Technology is back in performance mode. We’re ready to discuss the market with you. We look forward to hearing from you. to our discussion.
Greg Bonnell – So let’s start there. There’s been a lot of attention in the investment community on technology. I know you do a great job on the charts. Every time Ben Gossack is on, I promise my viewers I’ll show them the charts. So let’s start with technology and underperformance. When you said that before the show, I was like, “Oh really, I didn’t realize that.” But of course you did.
Benjamin Gossack – Yeah, we try to be very disciplined in our process. Some people call it pattern matching. You could call it good hygiene. It’s just flossing. It’s brushing your teeth that holds the stock. But we’re looking for areas of strength and weakness. We’re busy people, and we’re going to rely on the TV and the newspapers to tell us what’s going on. And they’ve said it’s technology, it’s AI, it’s chips.
But the technology industry has been underperforming for most of the year. I think it peaked around January. And then it only really picked up and started to move again in late April or early May. Of course, we were never worried, but that’s what makes up a significant portion of the market.
What’s impressive is that even though tech stocks have been underperforming, that hasn’t stopped the S&P 500 from hitting new highs. So I think it’s really important for people to know that this bull market that we’ve been talking about isn’t just being driven by tech stocks.
Greg Bonnell – So let’s show you some graphs that tell this story. These are the graphs that you guys provided. And these are trends in the technology space. So what are these graphs telling us?
Benjamin Gossack – You should now have two charts on your screen. The way to look at relative strength and weakness is as a fraction. The numerator is the XLK ETF, which is an ETF for the S&P 500. And then you divide that price by the S&P 500. Just eyeball it. Don’t worry about the scale. If it’s up, that means tech is dominating. If it’s down, that means tech is dominating.
The reason we look at the left side, by market cap, is that on the right side, we take the same stocks, but we do it in an equal weighting. So an equal weighting of tech stocks and an equal weighting of the S&P 500, and this allows us to look at the entire market. So if someone is saying that tech stocks are only doing well because the big tech stocks are outperforming, then we can back that up. We know tech stocks are outperforming, but if we can show you on an equal weighting basis as well, then if you put your hand in the hat and take a tech stock, you’re also more likely to outperform the market. So it shows us that there’s actually a range, not just leadership. That’s why we like to look at both.
You can see that the market cap leaders in tech, Apple, Microsoft, Nvidia, did well. Then they underperformed, but now they’re starting to recover. But we saw the same chart, the same pattern. When we matched this pattern with equal weighting, it was all of tech that underperformed.
Now, when something is powering up and performing well, eventually you have to take a break. So you go really fast. But you can’t maintain that pace for long. So sometimes you have to slow down, take a break, and hydrate. When the chart is going down, I can’t tell if it’s time to take a break or if it’s the beginning of a new trend. Maybe you fell and hurt yourself. I don’t know.
So sometimes we need hindsight. When we saw it bottom out in late April, early May and then it started to rise again, we knew, of course, we were just taking a breather. But throughout that pullback, instead of predicting what we want to see, we think about what the market is trying to tell us.
Greg Bonnell – So what’s really going on there, on that theme, there were some pictures that showed what’s going on in that sector with respect to discretionary stocks.
Benjamin Gossack – This is really remarkable. It’s great to see the technology come back to life.NVDA, NVDA:CA) Revenues will recover. We’ve seen all the peripherals related to hardware that work in the technology space. So I don’t think it’s hard to make a case for that. It’s a question of do you want to see what you want to see or do you listen to what the market is telling you? On the left, we’re looking at market cap weighted discretionary rollover. And on the right, we’re looking at equal weighting.
Greg, I don’t spend much time on the market cap side of discretionary investing because it is so dependent on Amazon (Amazon, AMZN:Canada) and Tesla (TSLA, TSLA:CA). They overwhelm everything else in the sector, so you never really learn about discretion.
On the equal weights, the really notable thing is that the equal weighted discretionary stocks outperformed the equal weighted S&P 500 over the last year. Again, not just seven great stocks. The discretionary stocks outperformed. Discretionary stocks are what we want versus what we need. So this is a nice way of saying maybe things are better than we feared. But now that fear is being reversed. So if you’re a bearish tone, you’d say, oh, this helps me, the consumer must be in trouble.
Greg Bonnell – Yes, they are indeed starting to feel the pressure from rising borrowing costs and rising inflation.
Benjamin Gossack – And inflation. That’s where you have to be careful. Yes, we know it’s going to go down, but if you look at individual stocks, stocks that were underperforming before are underperforming even more. For example, there are big brands that were dependent on China for growth. Nike (NKE) or Starbucks (SBUX). Their performance has been poor and will continue to be poor.
Another area is price wars by companies like McDonald’s (MCCD, MCDS:CA). So costs went up, employee benefits went up. Maybe they took advantage of the market, but prices went up, so people started protesting. So now we have $5 menus. And now companies and restaurant brands like Burger King and Wendy’s are (Wen) react. The market loves rising prices, but hates price wars. So these stocks have suffered.
The two areas that I think are really important to me are the ones that continue to work and start to work unwaveringly in 2022. Anything that’s travel related. Cruise lines are doing well. Hotels are doing well. All of the financials that are travel related are doing well. And home builders. I told you this started to work when the Fed started raising interest rates, but the home builders continue to hold strong. I’m concerned about when these rollovers will happen. Is it bad for consumers to say that McDonald’s is going to have a competitor and we’re going to be able to buy their products for less? Are consumers on strike right now?
The other thing I want to say, and a note about discretionary investing, is that it’s better to look at necessities versus discretionary investing, because it’s desire versus necessities. And guess what? Necessities, stocks, did even worse. So whether the world is discretionary versus necessities, long versus short, you’re still better off long discretionary investing and short necessities.
So, like everything, this is more complicated. It’s notable to me that discretion has weakened, which is not a good sign. But I’m not ready to say that things are really changing right now. It’s just that what was bad has gotten even worse.
Greg Bonnell – Great insight on that. Another area you look at is public works, which is sometimes thought of as maybe not the most interesting area.
Benjamin Gossack – Yes. So, as you can see from our charts, utilities have had a string of downturns. You can see that in terms of market cap, you can see that in terms of equity allocation. And right now, what we’re facing is a downturn, so to speak. And like everything, there’s a catch-up period. So when you get ahead, I said you need to take a breather. Sometimes it’s like, it can’t get any worse, it’s going to get a little better. I’m at rock bottom, how far can I go? It can only go up from here. And utilities have come up from the bottom.
Now, some would say, that’s great, I want to be the one who bought at the lowest price, and then we’re going to go through a period of performance. For us, is it just going to go back to the original downward trajectory, or is it a period of a new trend? We don’t know, so we’ll just have to wait and see. And already we’re starting to see utilities encounter resistance. But what I think is really important to share with you is that the market is picking winners in utilities. We’re talking about chips, we’re talking about hardware, people want to build data centers.
And now we’re starting to see articles about how they need to power their data centers, they’re trying to turn everything else into electricity. So the world is running out of electricity, and the market is picking winners who they think will hold onto that power for a long time: nuclear, natural gas, renewables. And some of these utility stocks are soaring in anticipation of the need for more power generation. And the companies that can supply natural gas and nuclear power today are going to be the ones to make deals with Microsoft (MSFT, MSFT:CA), Apple (AAPL, AAPL:CA), Oracle (Orks) Because we need a lot of energy right now.
