Market Strategy Radar Screen Weekly September 17, 2018

Give Me Some Lovin’

Still unloved, this bull market climbs the wall of worry

Last week saw stocks rally on the back of signs of progress in global trade negotiation activities. Talks with Canada showed it might be willing to make a deal with the US around dairy products similar to the deal it made with Europe earlier this year. A few signs that Europe and the US could come to an agreement sooner rather than later lightened trade war concerns as well. There were also signs that China was warming up to the idea of making a deal with the US to avoid further challenges to its economy as it navigates domestic issues tied to debt and slower growth.

Even after President Trump threatened to extend the US tariff regime across most Chinese goods destined to the US stocks managed to “keep the faith” posting good gains across the major indices for the week. The Dow Jones Industrials, the S&P 500, the S&P 400 (midcaps), the Russell 2000 (small caps) and the NASDAQ Composite (some 40% weighted in technology or tech related stocks) respectively gained 0.92%, 1.2%, 0.95%, 0.50% and 1.4% on the week.

As of last Friday’s close the same indices on a year to date basis were up respectively 5.8%, 8.7%, 7.7%, 12.1% and 16.03%. (See pages 6 and 7 for details).

Not too shabby we’d say based on all the challenges and swings in sentiment stocks have faced from trade war risk, concerns about rising interest rates, interest rate differentials with foreign debt, along with the implications on US multinationals from a strong dollar.

It reminds us that when push comes to shove what matters most to stocks are good fundamentals related to the economy and corporate revenues and earnings.

In the international realm stocks broadly fared well last week as reflected by the MSCI EAFE (developed world ex-US and Canada), MSCI Emerging Markets and MSCI World ex-US indices reflecting the afore-mentioned improved signals on trade talk progress, which served to ease some worry in the international stock markets and point investors toward their attractive valuations.

Concerns over the potential for a protracted trade skirmish have weighed heavily on international markets this year as foreign economies mostly tend toward greater dependency on the strength of their exports (much of which are destined for US ports) to drive their GDP (economic growth).

Among the sectors that have captured investors’ and observers’ attention this year stateside has been Information technology. Last week the S&P 500 Information Technology sector advanced 1.8% outperforming the underlying benchmark and ranking fourth among the 11 sectors as market participants argued the case for tech.

Stocks got a boost from Apple’s (AAPL) latest generation of iPhones introduced last week. Those appeared to pass muster with investors even as they gasped at the higher prices of the new models.

Semi-conductors, which had recently come under some pressure, rallied on the week in part on the new product news from Apple as well as the improved sentiment toward the possibility of trade issues getting resolved sooner rather than later.

Technology like the broader averages this year has proved resilient even as it has been challenged several times. Consider that the Information Technology sector has bounced between gains and losses for much of this year declining a little over 10% from a high in January, then dropping 9.7% (from a higher level than it had achieved in January) and then falling over 5% respectively from three separate rally highs in April, June and July.

From each of these pullbacks tech stocks have rallied to achieve new highs. Last week the Information Technology sector appeared to begin yet another—a rally after a little more than 3% spill from late August.

Each time tech slipped this year bears and skeptics have shown up in droves predicting the demise of the bull-run in technology. Each time they have been proven wrong as fundamentals pertinent to the sector have so far countered the bears on each occasion.

From our perspective on the market radar screen it looks like the ubiquitous nature of technology persists in positioning it to serve both business and the consumer affecting the way individuals and corporations interact with each other in dramatic game changing manners. It’s the ubiquitous nature of tech that could help the technology sector extend its stay “in the winner’s circle” for longer than many skeptics think.

Consider that the advancements in technology today are affecting a myriad of transitions occurring in every sector of the S&P 500 and in every economy around the world (albeit to different degrees) perhaps as dramatically today as the invention of the automobile when it displaced the horse in the last century.

As we went to press with this week’s edition, news crossing the tape indicated stocks in Asia were wobbly in consideration of the potential for further escalation of the tariff situation. We believe that cooler heads will ultimately prevail. For now we suggest investors continue to practice patience while trade issues get worked out. In our view right sized expectations are key for investors to position for potential gains ahead. Expect progress not perfection.

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