FWIS 6.28 Rotation in the market leadership from technology to cyclical companies

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Dear Friends,
We have been witnessing a rotation in market leadership from technology to cyclical companies, and the question is whether that rotation will continue? For the past year and a half, Americans have been working from home using applications such as Zoom or Cisco Webex to conduct business (and many dealings they would have otherwise carried out in person). Until very recently, this gave many technology companies and other growth sector industries, such as consumer discretionary and communication services, a massive boost, particularly where there were so many other economic uncertainties.
With pandemic restrictions lifted and offices repopulating, many companies in the technology sector have started to see a decline in demand for their services since their technology is best suited for the work-from-home environment. According to LPL Financial, value stocks have benefited from the economy opening back up. Sectors like financials, materials, industrials, and even energy, have directly benefited from the recent return to the office. As a result, value stocks are viewed more positively, and growth stocks, in contrast, have been downgraded to neutral. Goldman and JPMorgan Chase share similar views. Indeed, value companies have returned 17.4% year to date, where the growth companies have only returned 10.2% year to date.
Part of this has to do with the high valuation of the tech sector during the pandemic. The tech sector’s Price to Earnings ratio has the highest premium to the value sector since the turn of the century when basing the valuation on the Russell 1000. When basing it on the S&P 500, the gap is smaller yet significant with a 20% premium. This, however, can’t be said for the tech sector’s performance in the markets against the S&P 500. Since the tech sector’s peak in September, it has slowly evened out and begun to decline. This is at odds with the fact that 90% of the tech sector’s stocks are above their 200-day averages resulting in a neutral relative trend.
Although the outlook for the technology sector has changed to neutral, the demand for technology will continue to be strong once we return to “trend” growth. Many of the strongest technology companies have fortress balance sheets and they are not going away. Other technology companies will continue to maintain a certain percentage of remote workers implementing a hybrid work schedule, and the need for virtual communications will remain strong. Growth in this sector may decrease, but it will remain an important part of an investment portfolio. We are seeking balance, above all else, with the idea that there are many ways to make money and we should broaden our circle of investment opportunities to include these companies that fare well in a reflation environment.
If you have any questions, please reach out.
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