We Remain Constructive on Tech, However........

The following headline crosses my screen after what was a strong start for the market this morning:

The S&P 500 and the Nasdaq turn negative as tech rolls over.

We do remain constructive on tech going forward, however, per the following, not as much as we were this time last year:

In recent portfolio review meetings we've been suggesting to clients that if the technology sector continues on its present tear, our portfolios may have a tough time keeping pace with or outperforming the S&P 500 in 2018. Not, mind you, that beating the S&P 500 is in any way our main objective: Our objective, as we see it, is to make consistently smart, thoughtful, well-researched longer-term asset allocation decisions on behalf of our clients. It's just that it's virtually a must in our business to benchmark equity portfolios against popular indices.

So why might the tech sector itself point to potentially over-sized returns for the S&P in 2018? Well, it's because it presently occupies a whopping 25+% of the index. 

To explain where we're coming from in terms of how we're approaching the tech sector in the context of client portfolios, here are two recent entries to our internal market log on the topic:

3/11/18

Tech is trending every bit as good (better from a return standpoint) as financials. While we bumped our target from 12% to 13% on Feb 16 (after reducing it from 15% to 12% late last year), I’m not inclined at this point to go higher, although we’ll definitely continue to bias the top of the range.

Here’s basically why:

After a huge run last year and, thus, sporting a 19.5 forward p/e vs 17.8 for the S&P (although that’s the least of my concerns as history suggests that valuation by itself is an unreliable forward indicator), the sector stands to be more vulnerable (relative to other sectors) in a volatile environment. That said, it’s held up incredibly well amid the present correction, and is killing the other sectors year to date.

A bigger concern for me is that tech has the highest foreign revenue exposure among the major sectors: Which is an issue in terms of protectionism (saw a headline that suggested China may hit back at U.S. via  Apple, for example [although I’d be surprised]), and – perhaps more concerning -- what I view as a decent chance we see the dollar ultimately trade higher in 2018.

3/12/18

This -- the excerpt below -- is the concern I mentioned re; tech yesterday morning. Still, an outlier (that is, an all out attack against Apple, etc., from China) in my view... China doesn't want a trade war, and U.S. tech employs a lot of Chinese workers. That said, some of the rhetoric (on top of the tariffs) out of the U.S. could unnerve China enough to cause a real problem...

Techinvestors in Apple and other stocks in crosshairs of trade war

Panic, on either front, would be an overstatement. The real threat from the new metals tariffs is that a broader, global trade war would have unintended and unpredictable consequences. And in the stock market context, a national security-defined trade war could be more significant — and harder to account for — in the market's best and most widely invested sector: technology. The damage could be much bigger than the "rounding error" within Apple earnings from the steel and aluminum trade penalties.

"With potential trade wars with China front and center, and tariffs looking like the Fort Sumter that could set off a battle royale with tech space getting caught up in the crosshairs, we believe the moving definition of national security interests has gone from background noise to a more relevant issue for tech investors," said Daniel Ives, chief strategy officer and head of technology research at GBH Insights, and the analyst who said this week that the steel and metal tariffs specifically were an Apple earnings' rounding error.

"China has some fighting words, and Silicon Valley and the Street are starting to get nervous with Trump igniting the match," Ives said.

In this week's message I'll explain why we particularly like financials going forward...