No surprise, but at DataTrek we love old maps. On the walls in Nick’s apartment are:
- A tourist map of Paris from 1867, which predates now well-known sites like the Eiffel Tower by decades.
- A site plan done on in the early 1800s of Palmyra, an ancient Roman colonial city Nick visited in the late 1980s on a trip to Syria.
- A street map of the West 50s in New York City from 1927, more recently home to DataTrek HQ.
Markets have their own roadmaps in the form of past performance. These don’t necessarily tell you the best way from Point A to Point B just now, but you’d rather know where the historical boundaries sit instead of just blithely ignoring them.
With that comparison in hand, let’s look at Q1 2019 sector performance for US Large Caps, where the S&P 500 logged a 13.1% gain last quarter.
Sectors that outperformed the S&P 500 on a price basis in Q1:
- Technology (21% weighting): +19.4%
- Real Estate (3%): +16.8%
- Industrials (9%): +16.5%
- Energy (5%): +15.3%
- Consumer Discretionary (10%): +15.0%.
Important caveat: Amazon is 24% of the sector, and its 18.6% YTD gain was worth 4.0 points to the group. Without AMZN, Consumer Discretionary is only +11.0% (less than the S&P 500 YTD).
Sectors in line with the S&P 500 for Q1:
- Communication Services (10%): +13.3%.
Important caveat: Facebook is 18% of the sector, and its 27% YTD gain was worth almost 5 points to group. Without FB, Comm Services underperformed.
Sectors that lagged the S&P 500 in Q1:
- Health Care (14% weight): +6.1%
- Financials (13% weight): +7.9%
- Utilities (3%): 9.9%
- Materials (3%): +9.9%
- Consumer Staples (7%): +10.5%
Here is what we think is notable about all this:
- Only 38% of the S&P 500 by weighting outperformed in Q1, and Tech was the only “large” sector to beat the index.
- The low sector-to-market correlations we’ve highlighted this year are on full display with these results. An easier Fed and lower long-term interest rates delivered a rising tide, but the boats are not rising at the same pace.
- The setup in Q2 comes down to one question: will Tech continue to be leadership and set the market tone for the new quarter? Since we see a rotation into Health Care and Financials (the next 2 sectors by weight) as unlikely, our answer must be “Yes”. The former, as we have been writing about, is towards the top of its historical valuation range. The latter is plagued by worries about interest rates. A quick reversion to the mean in terms of Q2 performance seems unlikely.
Now, let’s move on to the Dow Jones Industrial Average.
The Dow rose 11.2% in Q1 2019, or 2,601 points; here are the names most responsible for that advance:
- Boeing (10.0% weight): 421 points (16% of the Dow’s gain)
- Apple (5.0%): 233 points (9% of the gain)
- IBM (3.7%): 204 points (8% of the gain).
- Goldman Sachs (5.0%): 171 points (7% of the gain)
- Visa (4.1%): 171 points (7% of the gain)
- United Technologies (3.4%): 162 points (6% of the gain)
- Summary: these 6 names represent 53% of the Dow’s YTD advance
Why we care: Wall Street looks at the S&P 500, but the Dow is Main Street’s measure of the current state of US equity markets. That it lags the 500 YTD isn’t important – the Industrials are still up double-digits YTD, after all. Still:
- Boeing’s 10% weight means there is a transmission mechanism from its current woes to US domestic consumer confidence. We’ve called BA “the most important stock in the market” for this reason.
- There is other idiosyncratic risk built into the Dow by virtue of its price-weighting and small base of holdings. Just 10 names make up 53% of the Average. Aside from Boeing, the others are: UnitedHealth (6.5%), 3M (5.4%), Goldman (5.0%), Home Depot (5.0%), Apple (5.0%), McDonald’s (5.0%), Visa (4.1%), IBM (3.7%) and Johnson & Johnson (3.7%).
Pulling all this together into one final point: Q1’s performance map clearly shows all roads lead to Tech just now. That makes sense to us: lower interest rates help high-valuation stocks and increasing confidence in a US-China trade deal dovetails with this industry’s high percentage of non-US revenues. Still, it means Technology is the lynchpin to where US equities go in the second quarter.