Today, half of the top 10 ranking companies by market capitalization are technology and communications companies. While these companies like Apple, Microsoft, Amazon, Alphabet (Google) and Facebook may receive the lion’s share of attention, technology and communication companies as a whole have surged to become the dominant sector in financial markets over the past few decades. And despite the stronger fundamentals of these companies relative to the dot-com boom 20 years ago, there are still questions about the sustainability of the dominance of this sector going forward. So what does the history of the U.S. stock market tell us about sector dominance?
Our weighted average return in January was +8.22%. Since 2015, we have generated a net return of +38.15%.
In terms of investment strategy performance, our weighted average net returns for January were (a) +2.36% for conservative strategies, (b) +7.64% for balanced strategies, and (c) +11.17% for aggressive strategies.
January was a considerably better month than December. As mentioned in last month’s commentary, US Fed Chairman Powell’s statement that the Fed was “listening closely to markets” on January 4th proved to be just what the market needed to stop panicking about the prospect of rising rates. The partial resolution of the US government shutdown added to positive sentiment, as did more positive dialogue regarding trade tariff negotiations between the US and China. As such, the S&P 500 (SPY US) rose +8.01%, Emerging Market equities surged +10.34% (EEM US) and Emerging Market bonds gained +4.78% (EMB US).
On Tuesday, Apple reported “disappointing” 1Q FY19 results, as total revenue fell 5% y/y to only $84.3 billion. Net income was $20 billion, essentially flat y/y, while earnings per share were an all-time high of $4.18 (+7.5% y/y), although this growth was helped by a reduced share count due to buybacks. The fall in revenue was mainly attributed to iPhone revenue (61.7% of total revenue) falling 15% y/y, and management explained that this was entirely due to weakness in Greater China. Guidance for the next quarter also wasn’t very remarkable, with gross margins expected to decrease and operating expenses expected to grow. So why did the Apple’s stock price increase by almost 7% the next day?
Those familiar with cloud services companies usually think of the high-flying salesforce.com (CRM US) as the standard-bearer for success. Salesforce is the largest provider of cloud-based customer relationship management (CRM) software services in the world, and its expansive and well-integrated ecosystem covers e-commerce, marketing services, analytics and more, helping it best serve customers across diverse industries. In the life sciences industry, however, there’s another player – Veeva Systems (VEEV US) – that’s established itself as the top player, and it’s done so in an interesting way.
2018 was a tough year for bond investors. US Total Bond Market (represented by BND US ETF) returned -0.1% and Emerging Markets Bonds (represented by EMB US ETF) returned -5.5%.
Looking at last year’s returns, a logical question arose: what should we do with our exposure to Emerging Markets (EM) Bonds? Should we keep our allocation unchanged, reduce or eliminate it and replace it with US Treasuries?
The logical chain of thought dictates that investors require higher rates of return for higher levels of risk. If the FED is increasing rates, increased rates provide an option to have investments in safe government bonds with higher yields than before. It raises the required rate of return for taking higher risks, thus investors require higher yields on riskier assets for example EM bonds. It should also lead to a higher spread between EM Bonds and US Treasuries.
Our weighted average return in December was -8.26%. Since 2015, we have generated a net return of +27.65%.
In terms of investment strategy performance, our weighted average net returns for December were (a) -0.11% for conservative strategies, (b) -5.83% for balanced strategies, and (c) -13.14% for aggressive strategies.
December was the worst month for the S&P 500 index (-9.18%) since February of 2009, capping off a year that generated negative returns in all asset classes except short-term US government debt.
Apple’s Business Model
Apple has every right to the outsized profits it makes on the iPhone. Consumers could buy cheaper Android devices, but they don’t. Why? Because they value Apple’s hardware, or iOS software, or most likely, the ubiquity of the brand and the status that it has come to represent.
If you want the Apple experience, you buy Apple hardware, and in turn, use Apple software. And in order to access the digital content market install any other applications, you also have to go through Apple’s App Store. Apple does nothing to increase the value of Netflix or Spotify subscriptions, among many other digital services from app providers purchased through the App Store, but they charge a percentage for every one of these transactions (e.g. 30% in the first year, 15% every year after that for recurring subscription payments) just because they can, and will continue to be able to do so while ~45% of U.S. consumers, the world’s largest market, carry Apple devices.
Our weighted average return in November was -0.96%. Since 2015, we have generated a net return of +38.73%.
In terms of investment strategy performance, our weighted average net returns for November were (a) +0.15% for conservative strategies, (b) -0.09% for balanced strategies, and (c) -2.11% for aggressive strategies.
Markets continued to be extremely volatile in November. The S&P 500 index traded all over the place, giving up -3.83% in the third week of the month, before jumping +4.71% the very next week. By month end, the S&P 500 had gained +2%. Emerging market stocks (+5.07%) finally managed to rally on the back of lower US bond yields, and US investment grade bonds ended the month +0.64%.
Our weighted average return in October was -3.88%. Since 2015, we have generated a net return of +40.48%.
In terms of investment strategy performance, our weighted average net returns for September were (a) -1.36% for conservative strategies, (b) -6% for balanced strategies, and (c) -2.97% for aggressive strategies.
October was a brutal month. In all of 2017, the S&P 500 index had 12 trading days where the daily change in price exceeded 1%. October had 10 such trading days. The monthly performance for key equity index ETFs were as follows: S&P 500 index -6.91% (SPY US), Euro Stoxx 50 index -8.18% (FEZ US), and MSCI Emerging Markets index -8.76% (EEM). Bonds outperformed equities, but there was nowhere to hide in the fixed income space as well. The Vanguard Total Bond Market ETF was -0.86% (BND US), the iBoxx $ High Yield Corporate Bond index (HYG US) was -1.98% and the JPMorgan Emerging Market Bond index (EMB US) was -2.42%. Ugly numbers. The only safe haven was the US dollar, which increased 2.59% versus the euro.
Our weighted average return in August was +4.74%. Since 2015, we have generated a net return of +46.16%.
In terms of investment strategy performance, our weighted average net returns for September were (a) +.03% for conservative strategies, (b) +1.70% for balanced strategies, and (c) +9.37% for aggressive strategies.
September marked the 10th anniversary of the collapse of Lehman Brothers. Despite considerable media mention of this painful theme, US equities continued to trade higher and gained 0.59% in September, posting an impressive gain of 7.7% for the third quarter of this year. In terms of economic data, US consumer confidence hit its highest level since 2000 (around the peak of the ‘dot.com’ bubble), while US small business confidence hit its highest level since the National Federation of Independent Businesses began its survey in 1974. Moreover, monthly average unemployment figures hit their lowest level since 1969 – the year the US Apollo Mission successfully landed on the Moon.