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Why Investors Are Cheering Tech
Most of us look to January as a time of renewal. That’s true for your investments, when it comes to tracking annual performance. Certainly, 2019 looked a whole lot better than 2018 on those account statements.
As 2019 rolled into 2020, some investment trends continued. Notably, the technology sector continued its upward trajectory, after advancing a whopping 50% last year. Year-to-date, the sector is up another 6.17%, still leading the pack.
The Standard & Poor’s sectors are weighted by market capitalization. That means the largest companies have the most influence on overall sector performance.
Here are the biggest companies in the tech sector, along with index weight and year-to-date performance.
- Apple (ticker: AAPL): 20.17% weighting, 2020 return 8.40%
- Microsoft Corp. (MSFT): 19.10% weighting, 2020 return 4.65%
- Visa (V): 5.32% weighting, 2020 return 9.10%
- Intel Corp. (INTC): 4.52% weighting, 2020 return 14.40%
- Mastercard (MA) 4.36% weighting, 2020 return 8.53%
Continued optimism about the broader economy has contributed to strength in tech, but investors will get a clearer picture when companies begin reporting their fourth-quarter earnings.
Apple reported positive stats on Tuesday, while Microsoft and Mastercard are scheduled to report their figures this week. Intel reported its fourth-quarter results on Jan. 23, beating analysts’ estimates on the top and bottom lines.
Not all leading sectors are as dynamic as tech.
The staid, predictable utilities sector has notched a year-to-date return of 5.75%. This sector is, in some ways, the polar opposite of tech. These stocks are steady performers known to pay dividends, rather than reinvesting profits into fast-growth projects.
Utilities are considered “defensives,” since businesses and individuals need to keep the power going even during a recession.
While it’s often true that investors will load up on defensive stocks when they believe a recession is near, price appreciation in the utilities sector doesn’t necessarily signal an economic decline any more than growth in tech signals a new boom cycle.
The most heavily weighted utilities sector stocks are:
- NextEra Energy (NEE) 13.71% weighting; 2020 return 8.90%
- Southern Co. (SO) 7.74% weighting; 2020 return 9.01%
- Duke Energy Corp. (DUK) 7.46% weighting; 2020 return 5.56%
- Dominion Energy (D) 7.35% weighting; 2020 return 1.42%
- American Electric Power Co. (AEP) 5.37% weighting; 2020 return 8.09%
So what’s driving returns in this normally sleepy sector? One factor could be lower bond yields. As yields decline, investors often seek a replacement for lost income from their bond investments. Investments such as utility stocks, which pay high dividends, are often the ticket.
Those looking to jump into utilities’ recent rally should be cautious, however. It’s instructive to compare performance of exchange-traded funds tracking both the sector as well as the broader market.
The SPDR S&P 500 ETF (SPY) shows a total return of 2.15% year to date. The second and third weeks of January were strong, but the fourth week brought a decline of 0.96%.
Meanwhile, the Utilities Select Sector SPDR ETF (XLU) zoomed 3.66% the week ended Jan. 17, and tacked on another 2.4% the following week.
Caution could be in order, as big price leaps like that don’t continue indefinitely. It’s true that bond yields and recession fears could be stoking investor attention to the sector, but it’s a dangerous game to start jumping on bandwagons because recent price action seems like a predictor of what’s to come.
On the other end of the spectrum, energy stocks have been laggards of late. The Energy Select Sector SPDR ETF (XLE) is down 5.7% year-to-date. It ended 2019 on the plus side, with a return of 11.74%. Nothing to sneeze at, but its return was well behind the broader domestic large-cap market.
The largest stocks in the energy sector are:
- Exxon Mobil Corp. (XOM) 22.6% weighting; 2020 return -4.96%
- Chevron Corp. (CVX) 20.08% weighting; 2020 return -7.19%
- EOG Resources (EOG) 4.69% weighting; 2020 return -4.32%
- ConocoPhillips (COP) 4.61% weighting; 2020 return -3.71%
- Kinder Morgan (KMI) 4.24% weighting; 2020 return 1.84%
While worries about tensions with Iran and their effect on oil prices have subsided somewhat, there are fresh concerns about reduced demand from China.
Here again, it’s difficult to peg your investment philosophy to recent developments. Market forecasts are often wrong. As with tech (and all the other sectors), investors will get a better sense of energy sector strength after companies report fourth-quarter results.
