Macro Minutes: Tech Positioning in Current Market Cycle

Title screen appears, “Tech Positioning in Current Market Cycle”

Presented by: Jake Riddell, Fisher Investments Securities Research Analyst, on behalf of Fisher Investments Europe.

A man appears on the right side, down corner of the Screen Wearing a navy suit, sitting in an office. He begins to speak.

A banner identifies him as Jake Riddell Fisher Investment Securities Research Analyst. On behalf of Fisher Investments and its affiliates.

Jake Riddell: Hello. My name is Jake Riddell and I'm an analyst on the securities team within the Research Department here at Fisher Investments. I help cover the information technology sector, and we wanted to take a few minutes to revisit some of our thoughts on tech.

A white screen appears with a chart titled: "Correction-Y Bear Market “ The chart is showing Cumulative Return over the Days since Market Peak.

Jake Riddell: A good place to start is the unprecedented 2020stock market decline driven by the COVID-19 lockdowns. Now, before diving into this slide, let me pause a few definitions. We define a bear market as a decline exceeding 20%, while a correction is a decline between ten and 20%.

Jake Riddell: Bear markets typically last a year or longer, while corrections run their course in a few short months. Our analysis of market cycles shows us bear markets are often leadership resetting events, while corrections are not oftentimes the type of stock outperforming before, a correction continues outperforming after. In this chart, we compare 2020 downturn in yellow to the typical bear market in green and typical correction in blue. We can see that while the decline had the magnitude of a bear market, it had the speed and duration of a correction.

Jake Riddell: This suggests that despite the depth of the decline, investors treated 2020 more like a correction than a true bear market. Therefore, today's environment seems like a continuation of the prior market cycle, suggesting to us we are currently in late bull market territory. But of course, the shape of the decline in recovery aren't our only indicators.

Jake Riddell:Economically speaking, we saw a rapid recovery in things like global trade and retails pending mere months after lockdowns began.2020 then saw sharp GDP contraction, while2021 brought a strong economic rebound. Looking ahead, the IMF, for example, forecasts slightly above average GDP growth in 2022 and average global growth in 2023 and beyond. From a sentiment standpoint, one doesn't need to look far for late cycle symptoms the fervour around cryptocurrencies, NFTs and other fringe assets like trading cards, a big increase in stock market margin trading, the hot IPO market, crazy dislocations like the GameStop mania of early 2021, and so on and so forth. These types of economic and sentiment indicators signal to us that we are squarely in late bull market territory and support our view that today is a continuation of the prior bull.

The screen changes into another a chart titled” New Bull Market, Old Soul”

A subtitle would follow “Market cycle analysis supports large Cap Growth Leadership”.

The chart is showing Relative performance over %the way through the bull market

Jake Riddell: Where we are in the market cycle is an important consideration. Empirically, we know different types of stocks tend to fare better or worse in different parts of the cycle. In this chart, we average bull market performance for all bulls from 1970 to2007, segmenting the market cycle into thirds. When the black line is moving down, small cap value stocks are outperforming large cap growth, and when the line is rising, large cap growth is beating small value. We can see smaller and value-oriented companies tend to lead early in bull markets, while big growth companies outperform in the later stages. This historical analysis is one reason we believe big cap growth-oriented stocks are likely to continue leading, driven by our opinion that 2020 did not reset the market cycle.

Jake Riddell: This dynamic is hard to square with last year's performance, which actually saw value perform right in line with growth.2021 saw recovering interest rates and a booming oil market after both rates and oil declined dramatically in 2020.

Jake Riddell: Understandably, these dynamics helped classic value categories like financials and energy in the so-called reopening phase. But we view the reopening phase as largely complete and looking ahead, there are also fundamental reasons to expect growth leadership. For example, as the economic cycle ages, GDP growth tends to decelerate like many are expecting in 2022 and beyond. This benefits companies capable of growing in excess of the economy, and investors tend to reward that higher growth rate as broader economic growth slows. Determining our size and style preference is acritical early step in our portfolio construction process. After identifying our preferences, we must translate these into sector decisions.

The white screen, shifts into a new chart titled “Info Tech Features Growth Characteristics” with the following subtitle “Fundamentals support Tech and Tech-like sector selection”, this chart is showing many different economic sectors such as real estate, health care, Consumer staples, Materials and many more...

Jake Riddell: While growth and value characteristics can be somewhat subjective, one broadly accepted feature is wide profit margins. This is the result of growthy businesses offering innovative products, and it enables these companies to generate profits that can be reinvested in the business, setting up future growth prospects. Here we look at sector wide profit margins alongside the relative size of each sector. Clearly, the information technology sector boasts the widest gross profit margins of any sector. A growthy feature. The tech sector is also home to some of the largest financially healthiest companies in the world, offering many universally known bigger cap names from which to choose. For these reasons, the technology sector is a good thematic fit when scouring the globe for big growthy companies and why we choose to emphasize tech today.

The screen changes into a chart titled” 2000 Revisited? Earnings Suggest otherwise” the subtitle is “The dot-com bubble disconnect is not evident today”. The chart is showing info teach earnings & market cap over the years 1994 to 2020.

Jake Riddell: Now, when I discuss our current technology preference with clients, concerns about speculative bubbles often arise. Invoking memories of the late 90s.com bubble. These are understandable fears, likely propelled by media attention. But in our view, these concerns are overblown. In this chart, we look at the information technology sector within the S and P 500, comparing the sector's share of market cap with the sector's share of earnings. Isolating bubble potential within the tech sector. As we can see on the left side of the chart, in the late ninety S and early two thousand s, the tech sector's market cap as a percentage of the S and P 500 skyrocketed climbing to over a third of the index. As many internet companies went public and saw incredible returns, the media likes to point out that today the tech sector is nearing a similar milestone at nearly 30% of the index.

Jake Riddell: But what many miss are healthy fundamentals like earnings magnitude underpinning the large size of today's tech sector. As we can see, while the size of the tech sector swelled at the end of the earnings didn't keep pace, creating a vast disconnect between the valuation of tech companies and the profits they were capable of generating in reality. But that gap closed over a decade ago. And for much of the last ten years, the size and fundamentals of technology companies traded a near lockstep with some mild dislocations around corrections and the 2020 COVID decline. Technology companies today are vastly different from the tech companies of 20 or 25 years ago. When we consider today's late cycle environment, we see ample reason to be bullish on technology and little reason to fear a bubble. Tech stocks feature many attractive growth characteristics like wide profit margins and strong earnings growth. We expect investors to reward these growthy characteristics and feel they validate the size of the information technology sector.

The screen changes to a white screen, with the sentence “Thank you for watching. If you would like to learn more about our views, please reach out to your relationship manager or email FisherInstitutional@fi.com”

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