Market Commentary

Weekly commentary providing analysis with an outlook for the equity market.

April 18, 2018

Scott Wren, Senior Global Equity Strategist

Misconceptions

  • Many investors believe that the Information Technology sector has been one of, if not the worst performing of the 11 Standard & Poor’s equity sectors.
  • However, in fact, Technology along with the Consumer Discretionary sector have been at the top of the heap in terms of relative performance and have handily outperformed the S&P 500.

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Have you heard that the Technology sector has been “leading the market down” during this high-volatility period following the S&P 500’s all-time record high set on January 26? If you have watched or read much of the media coverage surrounding the recent/current pullback, you might have had the impression that the big Technology (internet software and services, social media) and Consumer Discretionary (internet and direct marketing) stocks that “everyone” owns or wants to own were getting shellacked and turning in terrible performance relative to the other nine sectors. (Remember, Standard & Poor’s categorizes all listed stocks into one of 11 different sectors. We make portfolio weighting recommendations on each of these sectors.)

If that is what most investors have been thinking, most investors would be wrong. In fact, since the record high in the S&P 500, the Technology sector has been the second best performing of the 11. The Consumer Discretionary sector has been the fourth best performing sector (some investors might be surprised to find out that not all of the “popular” high-flying stocks that get all the media attention are categorized as Technology stocks, but some are considered Consumer Discretionary sector stocks). Both have outperformed the S&P 500 since January 26. Now granted, since that record high, every sector has traded lower. But looking at it another way, a good number of sectors have underperformed Technology and Consumer Discretionary stocks on the way down. Only the very defensive Utility sector has hung in there better than the Technology sector.

And what about other time frames? Technology and Consumer Discretionary were the two best performing sectors relative to the other nine in both the year-to-date and the last-six-month time frames. Looking back over the last 12 months, Technology, Financials, and Consumer Discretionary were the best performers, in that order. Over all of these time frames, the Technology and Consumer Discretionary sectors meaningfully outperformed the S&P 500.

It is true that these two sectors carry a big weighting in the makeup of the S&P 500. As of the time of this writing, the Information Technology sector makes up just under 25% of the total market capitalization of the S&P 500 while the Consumer Discretionary sector makes up 12.7%. A big move in the Technology sector, up or down, has a noticeable effect on the overall level of the index. That, of course, is one of the reasons technology stocks garner so much attention. But in absolute terms, these two sectors, which contain a number of the most talked about stocks on the planet, have performed well and we believe should continue to contribute to the overall performance of the S&P 500 as the year progresses.

So the next time you listen to or read a media report or cross paths with someone who believes that “Technology stocks have really taken it on the chin,” give them the facts. The S&P 500 Information Technology Index is indeed down as the broader market has fallen from its record high earlier in the year, but it is by no means the worst-performing sector. Same with the S&P 500 Consumer Discretionary Index. Far from it. Any statement to the contrary is a misconception.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.

Definitions

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the U.S. stock market.

S&P 500 Consumer Discretionary Index comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector.

S&P 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the GICS® information technology sector.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

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