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Market perspective - June 2017

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Below please find a link to our monthly market perspective piece for June. This month we dive deeper into equity market year-to-date returns and discuss the narrow leadership that has re-emerged, primarily from several large technology companies.

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Market perspective - June 2017

  1. 1. Market Perspective – June 2017 Experience Insight Impact biegelwaller.com Overview: This month we dive deeper into equity market performance and discuss the narrow leadership that has re-emerged. There is always a concern when market gains are led by a limited number of stocks. However, the current members of leadership driving these market gains are dynamically changing the way our economy functions. This is all happening via seemingly sustainable competitive advantages and compelling cash flows, valuation concerns notwithstanding.
  2. 2. S&P Returns for 2017 Primarily Driven by Five “Technology” Stocks 2 Year-to-date (YTD), mega-cap technology companies are amongst the largest contributors to domestic returns. Facebook, Apple, Amazon (classified as consumer discretionary), Microsoft, and Google/Alphabet (together called FAAMG) performed between +14% and +33% in 2017. Together, these five companies contributed 30% of the S&P 500 Index performance YTD. Experience Insight Impact Source: Bloomberg
  3. 3. Tech Bubble? Not Likely 3 While these stocks have had uncharacteristically low volatility and their valuation multiples have expanded, we do not believe they are contributing to a bubble in technology similar to the tech bubble in the early part of the century. • Current valuations (P/E) are reasonable considering the quality of the franchises and current and expected growth rates. • Cash balances are high and free cash flow generation is healthy, whereas during the prior bubble many companies were unprofitable. • FAAMG stocks have a large and growing addressable market to spend capital. • Technology spending can be characterized as “smart” spending. Return on assets and invested capital are much larger than some other sectors of the economy. Experience Insight Impact Source: Goldman Sachs
  4. 4. Changing the Economy 4 These market leaders are changing the economy in a multitude of ways. Multi-trillion dollar opportunities exist to change behavior and to benefit the bottom-line profitability long-term. Below are a few examples: • Cloud - companies such as Amazon and Microsoft are centralizing infrastructure for computing technology. • Retail - Amazon is helping to change the habits of consumers around the globe. • Advertising - Google and Facebook are changing the way advertising is seen with analytical metrics of effectiveness. • Media Consumption - Apple, Amazon, Google and Facebook have and continue to disrupt traditional media consumption. Experience Insight Impact Online Offline Source: Smart Insights Source: RapidScale Source: Deloitte
  5. 5. Example: Advertising, Secular Opportunities Abound 5 Experience Insight Impact Advertising continues to move online at a rapid pace. According to PwC, Facebook and Google are predicted to make $106 billion from advertising in 2017, almost half of the world's digital ad spending.
  6. 6. Example: Retail Disruption 6 Experience Insight Impact Despite the notion that e-commerce dominates retail sales, e-commerce is currently less than 9% of total retail sales with a meaningful future runway for growth. Amazon accounts for 43% of U.S. online retail sales. With the recent announcement of Amazon acquiring Whole Foods, the expansion into additional areas of retail will surely be felt by traditional brick and mortar stores. Source: U.S. Census Bureau
  7. 7. Conclusion: A large portion of YTD market returns are from a handful of technology-oriented stocks. While markets will see periodic changes in sector leadership, it is likely that the technology sector will continue as an innovation driver and will benefit from the secular tailwind of ever-increasing digitalization. As investors, we continue to seek opportunities to participate in these secular trends that will enhance future returns, while keeping a close watch on the associated risk metrics. Experience Insight Impact Market Perspective – June 2017 7
  8. 8. Experience Insight Impact Disclaimer 8 Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy.

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