The tech sector has resumed its run higher after taking a breather earlier in the year. MoneyTalk’s Greg Bonnell discusses the outlook for the sector and the broader markets with Benjamin Gossack, Managing Director & Portfolio Manager, TD Asset Management.
Transcript
Greg Bonnell – While the big technology stocks grab all the headlines and are considered by many to be market leaders, they were actually underperforming there for a while. But our feature guest today says big tech is back. Joining us now to discuss that and some of the other trends he’s watching, Ben Gossack, managing director and portfolio manager with TD Asset Management. Ben, great to have you back on the program.
Benjamin Gossack – I’m back on the show. Tech is back in performance mode. So yes, ready to discuss markets with you– always looking forward to our discussion.
Greg Bonnell – All right, so let’s start right there. I mean, all eyes are on tech when it comes to the investment community. I know you do great work with the charts. I promise them to the audience every time that Ben Gossack’s coming on. So let’s start with tech and the underperformance. When you said that to me before the show, I went, oh, really– like, I hadn’t noticed. But, of course, you noticed.
Benjamin Gossack – Yeah, so we try to have a very disciplined process, and some people would call it pattern matching. You could call it good hygiene. So this is just us flossing. Holding the stocks is brushing. But we’re looking for pockets of strength and weakness. We are busy people, and you rely on, let’s say, the TV or the newspaper to tell you what’s going on. And they’ve been telling you it’s been tech, and it’s been AI, and it’s been chips.
But yeah, technology as a sector has actually been underperforming for most of this year. So it would have peaked out around January. And it wasn’t until maybe late April or early May that we saw it start to resume and start to work again. And now we’re like, of course, we were never worried, but that is a good chunk of the market.
What’s impressive is that even though the tech was underperforming, that didn’t stop the S&P 500 from reaching new highs. So I think that’s really important for people to know that this market, this bull market that we’ve been talking about is not just led by tech.
Greg Bonnell – So let’s bring up the chart that shows the story here because I know you prepared one for us. And Technology Sector Trends– there we go. And so what are these charts telling us?
Benjamin Gossack – OK, so you should be seeing two charts on your screen. The way that we look at relative strength and weakness is through a fraction. So the numerator is the XLK ETF. So this is the ETF from the S&P 500. And then we divide that price by the S&P 500. You just need to use your eyes. Don’t worry about the scale – if it’s going up, it means tech’s outperforming– if it’s going down.
The reason why we look on the left-hand side, which is the market cap– so market cap over market cap– on the right-hand side, we take the same stocks, but we do equal weight. So equal weight tech over equal weight S&P 500, and this lets us see through the market. So if someone were to say, well, tech’s working, and it’s only because the large cap tech stocks are outperforming, someone could make a case– and we’ve seen how tech has outperformed, but if I can also show it to you on an equal weight basis, it’s kind of like, put your hand in a hat, grab a tech stock, you have a good chance of outperforming the market too. So it tells me it’s not just leadership – There’s actually breadth. And that’s why I like to look at both.
And you can see the market cap leaders of technology– so again, the Apples and Microsofts and Nvidias were outperforming. It then underperformed and have now started to resume. But you saw the same chart, the same pattern. We matched that pattern on the equal weight, which meant it was all of tech that was underperforming.
Now, when you have something that’s powering up and outperforming, eventually, you have to take a break. So you run really fast. Well, you can’t sustain that pace for quite some time. So sometimes, you need to slow down, take a break, grab some water. And when a chart is descending, I can’t tell the difference between taking a break and maybe the beginning of a new trend. Maybe you fell and injured yourself. I have no idea.
And so, sometimes, we need the benefit of hindsight. And so when we see that bottoming at the end of April, beginning of May, and we see it starting to power up again, then it’s like, OK, of course, we were just taking a breather. But all through that pullback, rather than us projecting what we want to see, it’s more of like, what’s the market trying to tell us.
Greg Bonnell – What’s actually happening out there– so on that theme, in terms of what is actually happening out there, discretionary stocks. You have some pictures to show us about what’s happening in that sector.
Benjamin Gossack – So this is actually quite notable. So tech coming back, I’d say, OK, that’s great. We’ve seen Nvidia (NVDA, NVDA:CA) earnings come back. We’ve seen all the peripherals, anything tied to hardware working in tech– so I don’t think that’s hard to convince anyone. This is the one where it’s like, do you want to see what you want to see or are you listening to what the market’s telling you? So we’re looking at, on the left-hand side, market cap-weighted discretionary rollover. And, on the right-hand side, you’re looking at equal weight.
I don’t spend much time, Greg, on the market cap side of discretionary because it’s so dependent on Amazon (AMZN, AMZN:CA) and Tesla (TSLA, TSLA:CA). They overwhelm everything else within the sector – so you’re not really learning about discretionary.
On the equal weight, what was really notable is that equal weight discretionary outperformed equal weight S&P 500 throughout last year. Again, it wasn’t just the Seven Magnificent stocks. Discretionary was outperforming. And discretionary are the stuff that we want versus the stuff that we need. And so that’s kind of a good sort of saying, hey, maybe things are better than feared. But now that is rolling over. And so if you had a bearish tone, you’d say, oh, well, now this helps me – the consumer must be in trouble.
Greg Bonnell – Yeah, they’re actually starting to feel the heat now from the higher borrowing costs, from the higher inflation.
Benjamin Gossack – And the inflation. And so this is where we have to be careful. I do see it come down, but a lot of it, when I look through the individual stocks, the same stocks that were underperforming are underperforming more. So we have, let’s say, the big brands that depended on China to grow. Think of a NIKE (NKE) or Starbucks (SBUX). They’ve been underperforming. They continue to underperform.
Another area that rolled over– we’re seeing price competition for, let’s say, companies like McDonald’s (MCD, MCDS:CA). So, again, their costs went up. Employee benefits went up. Maybe they also took advantage of a market, but they raised prices to the point that people now are protesting. So now they have a $5 menu. And now we’ve seen companies, restaurant brands, like a Burger King or a Wendy’s (WEN) respond. Markets don’t like when– markets like when you raise prices – they hate when there’s 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 to work in 2022 that have not wavered– anything tied to travel. Even the cruise lines are doing well. We’ve seen the hotels do well. We’ve seen the financials tied to travel all do well. And the homebuilders- that’s something we’ve talked about that started to work when the Fed started to raise rates. The homebuilders continue to have power. I think when those rollover is when I’ll be concerned. To say that McDonald’s is going to have competition and make it cheaper for us to buy stuff, is that bad for the consumer? Is the consumer now on strike?
The other thing I would also say– and just caution people on the discretionary thing– is its more relevant to look at discretionary relative to staples because it’s wants versus needs. And guess what? Those needs– those stocks got even worse. So still, if the world was just discretionary versus staples and you were long and short, you’d still be better off long discretionary, short staples.
So like all things, it’s more complicated. It is notable to me that discretionary is weaker. That’s not a great sign. But I’m not ready to now say, oh, things are really changing. It’s just the stuff that was bad just got worse.
Greg Bonnell – Great insights on that one. Another space you’ve been taking a look at– and sometimes people don’t think this is perhaps the most exciting area – the utilities.
Benjamin Gossack – Yes. So utilities, as you can see from our chart– serial underperformers. We see it on the market cap side. We see it on the equal-weight side. And what we’re having right now is, let’s say underperform. And like all things, there’s a period of catch-up. So we talked about when you outperform, you need to take a breather. Sometimes, it’s like, it can’t get any worse, so it gets slightly better. I’m at rock bottom, how low can I go? I can only go up from here. And so we’ve seen utilities come up off the bottom.
Now, some people would say, that’s great. I want to be the one that bought it at the lowest price, and then it’s going to go through a period of performance. For us, is it just checking back to the original descending line? Or is it a period where we have a new trend? We don’t know, so we wait. And we’re already starting to see utilities run into resistance. But what I think is really important to share with people is that the market is picking winners in utilities. So we’ve talked about chips, and we’ve talked about hardware, and people want to build data centers.
And you’re starting to see articles now where they’re like, well, guess what, we need to power those data centers. And we’re turning everything else into electricity. So the world is short power, and the market now is picking winners who they think are long power, be it nuclear, natural gas, renewables. And there are a select group of these utility stocks that are just flying in anticipation of, yeah, we are going to need more power generation. And those that can provide natural gas and nuclear today are going to be the ones that sign those contracts with a Microsoft (MSFT, MSFT:CA), with an Apple (AAPL, AAPL:CA), with an Oracle (ORCL) because we just need so much energy now.
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