The rally in equities expanded last week as new asset classes became more favorable investments. Technology shares surged to the top of our rankings despite a tough Friday. Europe, which matched U.S. GDP growth in 2016, also showed that the old continent still has some life left.
An old leader is once again a new leader as technology categories took top slots in our Market Trend Rankings (see below). Technology has been a leader in the stock market for three decades. While many consider technology the “new economy” it has been with us some time as we have moved from gears to processors.
You can see in the graph below that technology has been a leader since the financial crisis. There are two reasons that technology has been a leader since early 2009. The first is that technology was still damaged from the 2000-2002 tech bubble bust and simply had more room to make up than other sectors. Another is the fundamental shifting in the economy we have seen with technological disruption.
As discussed last week, small-cap and mid-cap equities have rallied since mid 2016. This is in correlation with a stronger US dollar. Smaller companies do not derive much of their income from overseas as such the stronger dollar boosts their domestic sales. Their continued resurgence will largely depend on a firm dollar.
The Dow (DJIA) has done quite well as of late. Despite flirting with 20,000 for weeks, the bull market never broke and last week we saw 20,000. While the Dow (DJIA) is a focused price-weighted index verse a broadly diversified market cap weighted index, it does offer access to market leaders across the U.S. economy. That leadership is built on advantages for generating free cash flow even if their revenue growth is lower than smaller companies.
The financial and industrial sectors continue to advance on the back of perceived growth and tax policies from the new administration. Financials are also benefiting from the rising interest rate environment. Janet Yellen hinting at rising rates again last week certainly can be considered a harbinger of rate hikes to come.
International markets are also looking attractive again. Europe is up over 4% in the past month and their GDP growth on the back of quantitative easing might be real. At least markets hope so and are betting that way for now.
Asia and Latin America also rank as potential investment destinations. Excluding Japan, Asia is up over 7% in the past month and the region does represent considerable long-term economic growth opportunities. Latin America’s performance isn’t so heady, but it too has been in and out of rally mode as of late. The in and out is hard to catch of course and we prefer more stable trends than we are seeing in the United States.
The chart above shows how technology has led for 8 years. However, the chart below shows different leadership while including part of the tech crazed 1990s.
Over the longer 20 year period, the Russell 2000 has been a broad leader against other indexes. The Dow Jones Industrial Index comes in a respectable second. The question to ask is which past time frame is more likely to be represented in the next time frames?
Certainly it is difficult to divine the future, but it is interesting to consider we might be in the early phases of a crossover in leadership. What if technology has made up its lost ground and longer-term trends come back into place? We know that small-caps have outperformed over most long-term rolling time frames. Could that be happening again?
The dollar will have a lot to do with what sectors and asset classes do well. A firm dollar is clearly good for smaller and mid sized companies that do not have to compete overseas. A weakening dollar could shift leadership to the Dow and Nasdaq. We’d follow whichever trend that will develop.
If the dollar gets weaker we would also need to be aware of the commodity space. A weaker dollar on monetary actions, fiscal deficit running or an international event could drive commodity prices up significantly. That would be bad for many, especially small caps and individuals who would get hit with inflation.
THE MARKETS NOW
From mid-December to last week, the equity markets are in a period of consolidation which is very normal after prices rise rapidly. It was a way for investors to take a breather and look for confirmation on their forward-looking actions. Despite a slight bump that is happening now on political transition, that is not going to be the driving factor to the economy.
Big investors point out that it is a fool’s game to bet against America, regardless of volatility in any short time frame. In fact, volatility should be seen as an opportunity. Warren Buffett has made both points repeatedly about America’s inherent global advantages and using volatility to your advantage (by the way, he’s bought $12 billion worth of stock since autumn). Tactical asset allocators are in a good position to use such volatility when it occurs. That’s why we invest using trend following analysis.
Global View remains cautiously bullish until any real risks present themselves materially. Everything else is simply conjecture. We continue to stay overweight in the sectors noted at the top of our Market Trends Quickview Report seen below. As seen in that report, the money market option remains near the middle of our rankings. That means there are plenty of places to put money to work in a good risk-adjusted way.
Contact us with any questions or to discuss how our approach to tactical asset allocation can help you control risk and take part in opportunity.