WBIY - Big Tech Not The Only Sector Lifting Equity Markets

2023-11-28 13:13:00 ET

Summary

• Sectors beyond big tech fueling gains.
• Why some industrial stocks are getting investor attention.
• The trends driving markets higher.

The so-called magnificent seven tech stocks, including Apple and Nvidia, are often credited with being the key driver for markets. Ben Gossack, Managing Director and Portfolio Manager at TD Asset Management says a closer look at recent market performance may tell a different story.

Transcript

Greg Bonnell: Some market pundits have put the performance we've seen from the S&P 500 (SP500) this year down to a small concentration of big tech stocks, the so-called Magnificent Seven. But our guest today says if you dig a bit deeper, a different story emerges. Joining us now with more Ben Gossack, Managing Director and Portfolio Manager with TD Asset Management.

Ben, always great to have you here, always great to have your analysis. So let's take -- I know this has been a bit of a bee in your bonnet, thorn in your side, throughout this year, the Magnificent Seven. It's all about the Seven. You've done some digging here. Tell me what you found.

Ben Gossack: Well, I appreciate our chats. I look forward to it. Yeah, I'd say several of the episodes I've been on where we've chatted about stuff, that's been something I keep scratching at. We've talked about market breadth. We've talked about different areas of the market that have been performing and yet, I still look in my inbox and I see S&P 7 versus S&P 493.

And I still don't understand what's happening other than narratives can be very strong. We're all busy people and when someone says, if the S&P is up 19%, and it's driven by seven stocks and I see the seven stocks are up, I might stop my analysis there because I have more important things to do in my life.

Greg Bonnell: But you like to dig deep. You like to do analysis. You've done some analysis right now. And I think from what you were sharing with us before, we can definitely see some gains in the S&P 500 that go beyond just those seven names.

Ben Gossack: Yes. So I decided to count all the stocks in the S&P 500 that have delivered performance better than 19.3%.

Greg Bonnell: So it beat them or beat the broader index.

Ben Gossack: Right. So I did my analysis as of last Friday. So the S&P 500 was up 19.3% year to date, which is amazing, which is more than what people had expected. And I was expecting that I'd start counting the stocks that beat the market, and I'd stop at seven. But Greg, I stopped at 132.

Greg Bonnell: 132 -- so it's not just seven.

Ben Gossack: So there are 132 stocks year to date that have outperformed the S&P 500. What's also interesting to me is then I did the composition by sector. We have talked in other shows about the strength that we've seen in the industrial sector even though we're supposed to be in a recession and how that's odd.

We've talked about the strength of homebuilders. That's consumer discretionary. And we've thought, well, that's quite odd. I thought rates were so high and no one was buying houses. So why are those stocks outperforming? So, of those 132 stocks, it should come to no surprise that a good proportion of those winners came from technology.

Greg Bonnell: Yeah, so we've got a chart now we can show the audience. The big bar is, obviously, information technology. Your seven are in there. But even then, it's more than just seven in the infotech.

Ben Gossack: Yeah. So it would be Microsoft ( MSFT ) and Apple ( AAPL ) and NVIDIA ( NVDA ). There are 64 stocks that make up the tech sector in the S&P 500. 36 stocks are outperforming the S&P 500. So you had a 50/50 odds that on January 1st, if you picked one stock out of the tech sector that you would have outperformed the S&P 500. I'd say those are pretty good odds.

But yes, it's not just a select group of stocks. We see outperformance coming from hardware stocks, services, software, and the semis. So it's been broad-based in technology. And the next set of winners, there's 27 stocks that are in the industrial sector that are also outperforming the S&P 500.

And we've talked about themes such as the CHIPS Act, the Inflation Reduction Act that opened up a ton of credits, and government incentives for clean energy. So those stocks are benefiting as well. And then the other big bucket came from consumer discretionary. Again, not the typical sectors that you would think would outperform the market when we've been talking about a recession all year.

Greg Bonnell: Let's get that conversation, continue on recession, right? Because it's been hanging over us and hanging over us. You said parts of the market are performing that you wouldn't expect in a recessionary environment.

Other parts, I think, if we looked at that chart again that you would expect to be safe havens if we actually thought we were in a recession or heading into a recession have not been performing. What's with this recession story? Let's start there. What are we supposed to be thinking as this year is almost behind us?

Ben Gossack: And full disclosure, I don't challenge the recession thesis or the recession fear and there are many leading indicators that are telling us we're finished a recession, in a recession, still a recession to come. But it's kind of like when we were living in caves, and we saw an enemy we would run. And that's how we, as a society, lived.

Typically, the game plan has been, when someone says, hey, there's a recession around the corner, we run and we hide. And where do we hide in? We hide in fixed income, and we hide in consumer staples, and we hide in utilities, and we hide in REITs, and we avoid certain cyclical, dangerous, areas.

Greg Bonnell: Maybe technology stocks, maybe consumer discretionary stocks, maybe industrial stocks.

Ben Gossack: Maybe industrials, right? And so there was nothing wrong with the thesis of, hey, let's hideout. There is an issue when everyone shares the same thesis. And so the question I keep raising is, what do you win when you're the most bearish person in a room of bears? And the only answer I get is, if you're an economist, you go on a book tour.

But in the game of investing, typically, that's where people say, oh, let's be contrarian. But I'm not trying to be contrarian for the sake of being contrarian. It's just more of looking at the areas that are outperforming, then starting to ask more questions like why is this happening?

And it goes back to another episode that I know we did where we started talking about the market making a bottom last year in the summer. But if you looked at everything on a market cap perspective that was getting distorted, and you had to look at things more on an equal weight perspective to see that.

So it just -- again, I don't think we can fight narratives, but I think we, as investors, as stewards of capital, it's our job to question narratives and then look to the facts and the data to back it up. And a lot of times, that creates an opportunity.

Greg Bonnell: Let's talk about that. I know also that sometimes you have a problem with this arbitrary definition of when we should be gauging our success as investors that we've made another trip around the sun. Boom, it's January 1st. But some of us think that way. The year is drawing to a close. We're almost into December. With everything that's happened so far this year and defying expectations, do we take anything from that into 2024?

Ben Gossack: Yes, do not forecast. So I know we're getting to the end of the year. I'm already starting to see people's projections. This financial institution thinks the S&P is going to be at 5,000 at the end of next year. I just encourage people -- like, that's interesting. That's kind of what we want to hear.

But if you followed the forecast for last year, which was earnings cratering, which they didn't, equities following and cratering, which they didn't, yields collapsing, which they didn't, the most important thing is that you follow your process.

And for us, it's always been about secular trends. These trends can last three years, five years. And then we can avoid the demands in terms of, tell me what's going to happen in three months or six months.

I'm trying to learn how to play golf, Greg, and what I've learned is you can't start thinking of the next holes until you finish the first hole that you're on. And that's what I like to do when I apply that to investing.

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