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The technology sector has resumed its rally after taking a break earlier in the year. MoneyTalk’s Greg Bonnell discusses the outlook for the sector and broader markets with Benjamin Gossack, Managing Director and Portfolio Manager at TD Asset Management.
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Greg Bonnell – While big tech stocks grab all the headlines and are considered market leaders by many, they have actually been underperforming there for a while. But our special guest today says big tech is back. Joining us now to discuss that and some other trends he’s monitoring is Ben Gossack, Managing Director and Portfolio Manager at TD Asset Management. Ben, it’s great to have you back on the show.
Benjamin Gossack – I’m back on the show. The technology is back in performance mode. So, yes, willing to discuss the markets with you – and always looking forward For our discussion.
Greg Bonnell – Well, let’s start there. I mean, all eyes are on technology when it comes to the investment community. I know you do a great job with charts. Bring them back to the audience every time Ben Gossack comes up. So let’s start with technology and poor performance. When you said that to me before the show, I was like, oh, really — like I didn’t notice that. But of course I noticed.
Benjamin Gossack – Yeah, so we try to have a very disciplined process, some people might call it pattern matching. You can call it good hygiene. So that’s just our lead. Hold the arrows by brushing. But we are looking for pockets of strength and weakness. We are busy people, and you rely on, say, TV or the newspaper to tell you what’s going on. They tell you it’s about technology, AI, and chips.
But yes, technology as a sector has actually underperformed for most of this year. So it would have peaked around January. It was not until late April or early May that we saw work resume and start up again. Now, of course, we were never worried, but this is a big part of the market.
What’s impressive is that even though technology has underperformed, that hasn’t stopped the S&P 500 from reaching new highs. So I think it’s really important for people to know that this market, this bull market that we talked about is not just driven by technology.
Greg Bonnell – So let’s show the graph that tells the story here because I know you prepared one for us. And technology sector trends – here we go. So what do these charts tell us?
Benjamin Gossack – Well, you should see two charts on your screen. The way we look at relative strength and weakness is through fractions. So the numerator is XLK ETF. So, this is the S&P 500 ETF. Then we divide that price by the S&P 500. Just use your eyes. Don’t worry about the scale – if it goes up, it means superiority of technology – if it goes down.
The reason we look at the left side, which is market capitalization – that is, market capitalization over market capitalization – on the right side, we take the same stocks, but we give equal weight. So, the equal weight technology over the equal weight of the S&P 500, this allows us to see the market. So, if someone says, well, technology works, and it’s just because large-cap technology stocks outperformed, anyone can make an argument – and we’ve seen how technology has outperformed, but if I could also show you that on… On an equal weight basis, it’s like, put your hand in a hat, grab tech stocks, you have a good chance of outperforming the market as well. So it tells me that it’s not just leadership – there’s actually breadth. That’s why I like to look at both.
And you can see the leading technology companies by market cap – so again, Apple, Microsoft and Nvidias were outperforming. Then it performed poorly and is now starting to appeal. But you saw the same chart, the same pattern. We matched this pattern with equal weight, which means the entire technology performed poorly.
Now, when you have something going strong and outperforming, eventually, you have to take a break. So you are running very fast. Well, you can’t keep up this pace for a while. So sometimes, you need to slow down, take a break, and drink some water. When the chart goes down, I can’t distinguish between taking a break and perhaps the start of a new trend. You may have fallen and injured yourself. I have no idea.
So, sometimes, we need the benefit of hindsight. And so when we see that bottom at the end of April, beginning of May, and we see it start to rise again, then it’s like, well, of course, we were just taking a break. But throughout this pullback, instead of being shown what we want to see, it’s more like what the market is trying to tell us.
Greg Bonnell – What’s actually going on there — on that topic, in terms of what’s actually going on there, discretionary stocks. Have some pictures to show us what’s happening in this sector.
Benjamin Gossack – So this is actually very noticeable. So the return of technology, I would say, well, that’s great. We’ve seen Nvidia’s (NVDA, NVDA:CA) earnings return. We’ve seen all the peripherals, and anything related to hardware in the technology space – so I don’t think it’s difficult to convince anyone. This is it, do you want to see what you want to see or do you listen to what the market is telling you? So we look, on the left-hand side, at the estimated rollover weighted value of the market. And on the right side, you’re looking at equal weight.
I don’t spend a lot of time, Greg, on the discretionary market cap side because it’s based so heavily on Amazon (AMZN, AMZN:CA) and Tesla (TSLA, TSLA:CA). They overshadow everything else within the sector – so you don’t really learn about appreciation.
On equal weights, what was really notable is that the discretionary equal weights outperformed the equal weights S&P 500 throughout the past year. Again, it wasn’t just the 7 stocks that were great. My estimate was superior. And discretion is the things we want versus the things we need. That’s a good kind of saying, hey, maybe things are better than we fear. But now this is starting to roll. And so, if you have a bearish tone, you say, oh, well, now this helps me – the consumer must be in trouble.
Greg Bonnell – Yes, they are really starting to feel the heat now due to higher borrowing costs and higher inflation.
Benjamin Gossack – And inflation. This is where we have to be careful. I see a decline, but a lot of it is, when I look at individual stocks, the same stocks that underperformed are now underperforming. So, we have, for example, major brands that have relied on China to grow. Think Nike (NKE) or Starbucks (SBUX). They performed poorly. They continue to perform poorly.
Another area that has changed – we are seeing price competition, for example, for companies like McDonald’s (MCD, MCDS:CA). So, their costs went up again. Employee benefits rose. They may also have benefited from the market, but they have raised prices to the point where people are now protesting. And now they have a $5 menu. And now we’ve seen companies and restaurant brands, like Burger King or Wendy’s (WEN) respond. Markets don’t like when – Markets like to raise prices – They hate when there is price competition. So those stocks got worse.
The two areas that I think are really important to me that have continued to work and started in 2022 and haven’t wavered – anything travel related. Even cruise lines are doing well. We’ve seen hotels do well. We have seen that travel-related finances work well. And home builders – this is something we talked about and it came into play when the Fed started raising interest rates. Home builders still have power. I think when this extension comes is when I would be concerned. Is it bad for the consumer to say that McDonald’s will face competition and make things cheaper for us to buy? Are consumers now on strike?
The other thing I would also say – and I just caution people about discretionary – is that it’s more important to look at discretionary for commodities because it’s wants versus needs. And imagine what? Those needs – those inventories are getting worse. However, if the world is just discretionary versus commodities and you are long and short, you will still be better off than long and short discretionary commodities.
So, like all things, it’s more complicated. What I notice is that the estimate is weaker. This is not a great sign. But I’m not ready to say now, oh, things are really changing. It’s just that things that were bad got worse.
Greg Bonnell – Great insights on this topic. Another area that I looked at — and sometimes people don’t think this is maybe the most exciting area — is facilities.
Benjamin Gossack – Yes. So utilities, as you can see from our chart – sequential underperformers. We see it on the market value side. We see it on the equal weight side. And what we’re facing now is, let’s say, poor performance. Like all things, there is a period of catching up. So we talked about when you’re overperforming, you need to take a break. Sometimes, it feels like it can’t get any worse, so it just gets a little better. I’m at rock bottom, how low can I go? I can only go up from here. And so we saw utilities coming from the bottom.
Now, some people might say, that’s great. I want to be the person who bought it at the lowest price, and then it will go through a period of performance. For us, is this just going back to the original descending line? Or is it a period in which we have a new direction? We don’t know, so we wait. We are already starting to see utilities encounter resistance. But what I think is really important to share with people is that the market picks winners in utilities. We talked about chips, we talked about hardware, and people want to build data centers.
And now you’re starting to see articles where they say, well, guess what, we need to get these data centers up and running. We convert everything else into electricity. So the world is suffering from an energy shortage, and the market is now picking winners that it thinks have the longevity of energy, whether it’s nuclear, natural gas, or renewables. And there’s a selection of these utility stocks that are flying in anticipation that, yes, we’re going to need more power generation. And those who can supply natural gas and nuclear power today will be the ones who sign those contracts with Microsoft (MSFT, MSFT:CA), with Apple (AAPL, AAPL:CA), and with Oracle (ORCL) because we just need so much energy now.
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