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?
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.
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.
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.
Our weighted average return in July was +1.30%. Since 2015, we have generated a net return of +35.90%.
In terms of investment strategy performance, our weighted average net returns for July were (a) +1.07% for conservative strategies, (b) +1.77% for balanced strategies, and (c) +0.96% for aggressive strategies.
July was good month for most asset classes. Trade tensions remained heightened, but the outstanding strength of corporate earnings in the US and Europe pushed equity markets to new highs. S&P 500 earnings per share grew a phenomenal 25% year-over-year. While US corporate tax cuts certainly contributed to these gains, they were not the only differentiating factor. In their analysis of the Q2 earnings season, Goldman Sachs commented that: “the effective tax rate for the overall S&P 500 index equaled 25% in 2Q 2017, but fell to 20% in 2Q 2018. However, pre-tax earnings rose by an impressive 16%, ahead of the 13% expectation at the start of reporting season.” Truly, a superb result.
Our weighted average return in June was -0.32%. Since 2015, we have generated a net return of +34.16%.
In terms of investment strategy performance, our weighted average net returns for June were (a) -0.46% for conservative strategies, (b) +0.65% for balanced strategies, and (c) +0.16% for aggressive strategies.
Trump’s trade war antics took center stage in June, causing broad weakness in emerging market bonds (-1.49%) and equities (-4.54%), as well as base metals (copper -3.72%; nickel -2.18%; zinc -6.89%). The effect of trade wars is simple: tariffs increase costs to producers, which they then pass on to consumers. Higher prices for consumers lead to lower demand. Guess who wins? No one! Now carry this dynamic over to companies with multi-national supply chains and consider the disruptions tariffs might cause. Fun, right? And so, because markets dislike uncertainty, we saw considerable sell-offs in exporters and raw goods suppliers. No one can say for certain how long Trump’s trade war tactics will endure, but the longer they persist, the greater the chance they will damage economic sentiment.
OUR MAY RESULTS
Our weighted average return in May was +0.66%. Since 2015, we have generated a net return of +34.59%.
In terms of investment strategy performance, our weighted average net returns for May were (a) -0.91% for conservative strategies, (b) +0.04% for balanced strategies, and (c) +2.39% for aggressive strategies.
The dominant theme in May was the continued resurgence of the US dollar, which gained 3.5% versus the euro. The media attributed this move to political strife in Italy and Spain, but the fact of the matter is that the US economy is doing extremely well. First quarter earnings for the S&P 500 rose by 24% versus the same period last year and the flash manufacturing purchasing managers index also rose in May.
OUR APRIL RESULTS
Our weighted average return in April was +0.50%. Since 2015, we have generated a net return of +33.71%.
In terms of investment strategy performance, our weighted average net returns for April were (a) -0.41% for conservative strategies, (b) +0.40% for balanced strategies, and (c) +1.31% for aggressive strategies.
April was yet another volatile month with corporate earnings and geopolitical drama sending markets back and forth. Corporate earnings came in stronger than expected and gave a strong indication that the US economy continues to perform well. In the commodity space, Trump’s decision to back out of the Iran nuclear deal helped push oil prices up 7%. As mentioned is last month’s commentary, there was also significant volatility in the metals sector as the US applied sanctions to a number of Russian industrial titans. By the end of the month, the S&P 500 was +0.4%, the US dollar gained +1.8% versus the Euro and the Barclays Global Aggregate Bond Index was -1.6%.