the fiduciary rule; the UK election

advisers as fiduciaries

The fiduciary rule for retirement assets issued by the Labor Department goes into effect today, despite intense lobbying against it by the brokerage industry.

The rule requires financial advisers involved with retirement assets–with the notable exception of the 403b pension assets of government workers–to put their clients’ interest ahead of their own in dispensing investment advice.

In essence, this means that the financial adviser will no longer be permitted to recommend high-cost products with poor performance records to clients simply because they pay a high commission or that the broker gets an “educational” weekend for two at a beach resort for doing so.

The conceptual defense (such as it is) for such practices, which are still allowed for non-retirement assets, by the way, is that while the client is still not well off, he’s better off than if he had no advice at all.

No wonder Millennials are willing to take a chance on robo advice.

the British election

The British prime minister, Theresa May, called the election held yesterday with the intention of increasing her party’s four-seat majority in Parliament in advance of the first Brexit talks with the rest of the EU.

With one seat not yet decided, the Conservatives have lost 12 seats instead, according to the Financial Times.

As exit polls came out overnight predicting this unfavorable result, both Asian stocks with interests in the UK and sterling weakened.

Interestingly, as I’m writing this an hour before the US open, both sterling and the FTSE 100 are up slightly.  S&P 500 futures, which had also dipped slightly in Asian trading as the UK news broke, are trading two points higher this morning.

To me as an outsider, it looks like UK citizens are having serious second thoughts about Brexit (politicians in Scotland advocating it’s breaking with the rest of the UK lost, as well).  My point, though, is that except in extreme circumstances–like when Republican opposition torpedoed a proposed economic rescue plan in early 2009 and the S&P dropped 7%–politics make little day-to-day difference to stocks.

what about last Wednesday?

That’s the day the S&P 500 took a dramatic 2% plunge, with recent market leaders doing considerably worse than that, right after the index had reached a high of 2400.

Despite closing a hair’s breadth above the lows–normally a bad sign–the market reversed course on Thursday and has been steadily climbing since.  The prior leadership–globally-oriented secular growth areas like technology–has also reasserted itself.

My thoughts:

–generally speaking, the market is proceeding on a post-Trump rally/anti-Trump agenda course.  Emphasis is on companies with global reach rather than domestic focus, and secular change beneficiaries rather than winners from potential government action that have little other appeal

–while trying to figure out whether the market is expensive or cheap in absolute terms is extremely difficult–and acting on such thoughts is to be avoided whenever possible–the valuation of the S&P in general looks stretched to me.  Tech especially so.  This is especially true if corporate tax reform ends up being a non-starter.  My best guess is that the market flattens out rather than goes down.  But as I wrote a second or two ago absolute direction predictions are fraught with peril

–tech is up by 17.0% this year through last Friday, in a market that’s up 6.4%.  Over the past 12 months, tech is up by 35.2% vs. a gain of 16.8% for the S&P.  Rotation into second-line names appears to me to be under way, suggesting I’m not alone in my valuation concerns

–currency movements are important to note:  the € is up by about 10% this year against the $, other major currencies by about half that amount.  Why this is happening is less important, I think, than that it is–because it implies $-oriented investors will continue to favor global names

–the next move?  I think it will eventually be back into Trump-motivated issues.  For right now, though, it’s probably more important to identify and eliminate faltering tech names among our holdings (on the argument that if they can’t perform in the current environment, when will they?).  My biggest worry is that “eventually” may be a long time in coming.

 

 

investing in tech

A reader asked me to write about how I approach investing in tech stocks, an area I like and one which I think I’ve acquired some competence in over the years.

IT as a component of the S&P 500

Let’s start with the structure of the S&P 500, which, as of yesterday’s market close, looked like this:

Information Technology          22.5% of the index

Financials          14.1%

Healthcare          14.0%

Consumer discretionary          12.5%

Industrials          10.2%

Staples          9.3%

Energy          6.3%

Utilities          3.2%

Real estate          2.9%

Materials          2.9%

Telecom          2.3%.

Source:  Standard and Poors

Yes, the numbers add up to 100.2% but that’s just rounding and doesn’t affect analysis.

 

An obvious conclusion from this list is that when we buy an S&P index fund, almost a quarter of what we get is already tech.

A second observation is that 22.5% is a big number.  But if we look back to the end of 2009, when the current bull market was in its earliest stage, IT represented 19.8% of the index.  In other words, by far the largest determinant of IT sector performance in the bull market has been the upward movement of stocks in general.  (For what it’s worth, by far the largest losing sector has been Energy, which comprised 11.6% of the S&P 500 back then.)

Still, there have been spectacular winners, both individual stocks and subsectors, in IT.  So taking the time and effort to study IT stocks can pay big dividends.

placing IT in a business cycle context

Let’s group stocks by the sensitivity of their profits to the ups and downs of the business cycle, starting with the most aggressive (meaning most sensitive) and ending with the most defensive.  This is my list:

most aggressive

Materials

Energy

IT

Industrials  (this would be #3, except US industrials make mostly consumer            products)

less aggressive 

Consumer discretionary

Real Estate (this would be #4, except that a lot of the publicly traded vehicles are income-                            oriented REITs)

Financials

defensive

Healthcare

Staples

more defensive

Telecom

Utilities.

I’m sure that the lists others would come up with would rank the sectors differently.  Try it yourself and see.

What I make of my list is that IT will likely outperform anything lower on the list during an economic upturn and underperform during a downturn.

Two reasons:

–most consumer IT purchases, like a new smartphone or a new PC/tablet, are discretionary and can easily be postponed when times are tough, and

–for many modern corporations, capital spending means software.  And, in my experience, no matter how they say they maintain steady investment in their business, companies rarely outspend their cash flow.  When bad times lessen cash flow, companies–despite their promises–cut capex (i.e., software) spending.  Consumers, on the other hand, are much less draconian in their cutbacks, at least in the US.

 

Tomorrow, secular trends.