Two items today:
#1: Does the recent rally in US Tech stocks have staying power? Some return data to set the stage for this discussion:
- Year-to-date, both the S&P Tech sector (ETF symbol XLK) and the NASDAQ 100 (QQQ) have underperformed the S&P 500. XLK is +12.9 percent, QQQ +12.7 pct, with the S&P 500 +14.2 pct.
- But … Both S&P Tech and the NASDAQ have been on a tear in the last month. XLK +6.0 percent, QQQ +5.9 pct, S&P 500 only +2.0 pct.
Since we are in 2H 2021 preview mode this week, to answer this question we pulled the 100-day trailing returns for the S&P Tech sector, the NASDAQ 100 and the S&P 500 back to the start of 2005. A hundred trading days from now gets us well into November 2021.
The charts at the end of this section show 3 things about the relationship between these 2 flavors of US Tech (S&P sector, QQQs) and the market as a whole (S&P 500):
- First, no surprise but over time both outperform the S&P 500 by a healthy margin. The QQQs show an average 100-day return that is +1.1 percentage points above the S&P 500. The S&P Tech sector shows a +0.4-point higher average 100-day return than the index.
- Second, there’s a notably wide standard deviation around those mean outperformance numbers. For the QQQs, it is 7.6 points and for the Tech sector it is 6.8 points.
- Lastly, that means the 1-standard deviation performance band for the QQQs relative to the S&P 500 over 100 days runs -6.5 to +8.8 points and the S&P Tech sector runs -6.4 to +7.3 points.
As you can (just) make out in the charts below, back in mid-May (the 18th, to be precise) both the QQQs and the S&P Tech sector hit their 1-standard deviation downside returns relative to the S&P 500. Over the 100 days leading up to May 18th, in other words, the QQQs underperformed by 8.0 percentage points and the Tech sector by 8.6 points. Since May 18th, they have been doing better: XLK and QQQs up +8.5 pct, S&P +3.6 pct.
This historical relationship between XLK/QQQ and the S&P 500 is generally clear on one point: both versions of the US Tech trade should at least match the S&P from here through year-end 2021. Here is the relevant history back to 2005 for when both the QQQs and XLK cross the threshold to underperforming the S&P 500 by at least 1 standard deviation (as they just did back in May) and what happened in the next 100 days.
- March 2005: 7-9 percentage points of underperformance
- Next 100 days: 4 – 5 points of trailing 100-day outperformance
- June 2006: 7-8 points underperformance
- Next 100 days: 0.1 – 3.0 points of outperformance
- April 2008: 7-9 points of underperformance
- Next 100 days: 6 – 9 points of outperformance
- January 2013: 6 – 8 points of underperformance
- Next 100 days: modest underperformance (-2 to -4 less than the S&P 500)
It’s worth noting that even in the periods where XLK/QQQ did not really snap back over the forward 100-day horizon (2006, 2013) they did go on to substantially outperform over the subsequent weeks/months.
Takeaway: as we’ve been highlighting in recent weeks, we don’t think it is wise to underweight Tech here. The historical trading patterns of this group, whether you’re talking about QQQ or XLK, says it is at worst a market performer over the next 6 months and could actually be market leadership again. The only caveat to this observation is, of course, if interest rates suddenly climb due to inflation fears. That’s why the 2013 Tech trade noted above did not pan out as quickly as other timeframes since that period includes the “Taper Tantrum”. Even still, we’ll close by reiterating that 2013 was a great year for the S&P 500 (+32 pct) and by December US Tech was back to outperforming. Should we see any sudden Tech sector weakness in 2021 due to another Taper Tantrum, we would view that as a buying opportunity.
#2: “ESG” is now a more popular US Google search than “value stock” or “growth stock” and, as this chart back to 2019 shows, that’s a brand-new phenomenon. At the start of this period, “value/growth stock” searches outnumbered “ESG” by 3-4 to 1. Now, ESG searches outnumber more traditional investment styles by 1.2 – 1.9x.
Follow the track of the blue line (ESG search volumes) and you’ll see this trend:
Takeaway: we’ve reached the point where general investor interest in Environmental, Social and Governance issues is stronger than the old growth/value paradigm. We don’t think that will change until the next major correction or outright bear market. If your livelihood involves convincing other people to allocate capital for you to manage, then ESG has to be part of your pitch. It’s pretty much that simple.