June 5, 2018

Growth. It’s what everyone strives for. It could be personal or professional growth. It could be creative or intellectual growth. It could be growth of popularity or influence. Since we deal with investing, naturally we discuss the growth of our wealth. Preservation of capital is often cited as a main aim of investors and investment managers, but I bet pretty much every investor is more interested in seeing their wealth grow.

While we are on the subject, smooth consistent growth makes people happier than choppy ups and downs. What could be better than sitting back and watching your portfolio grow 1% a month, 12% a year? Who wouldn’t be happy with returns like that? But what if you had to withstand daily volatility of a plus or minus 3% every day? Some might opt out of that roller-coaster in favor of a tiny return of 0.02% a day – two basis points. Those daily baby steps would deliver a compounded return of about 5.5% a year.

I think by now, we all know that the growth of most portfolios really happens in spurts and pops. There are no such portfolios with smooth and consistent daily growth. Everything ebbs and flows. That’s just how things work. Let’s take this past week’s market performance as an example. Even in a four-day holiday-shortened week, it was a typically rocky ride, with significant up and down days. But when all was said and done, the week was just an average one. The S&P 500 Index rose about 0.5% for the week.

This points out an important concept to keep in mind – which I harp on all the time. The daily din of financial media and performance numbers is just that – a daily din. It’s noise. When all is said and done, people generally measure their portfolios over longer time frames, like 12 months, or five years, or more.

The important thing is that market leadership and weakness tends to unfold from little “disruptions” that can turn into “landslides” or shockwaves that can cause avalanches. Small sector shifts can turn into big sweeping trends. Those investors who wish to be at the forefront of superior portfolio performance will pay attention to the smaller moves and how they fit into the bigger picture.

Small Signals Often “Echo” Longer-Term Trends

This past week saw some nice movement in the sectors that echoes a much longer trend. First off, Real Estate powered up +2.13% last week. We haven’t seen a surge like that in Real Estate in quite a while. It’s worth taking note of this sector, to see if a larger trend develops. What caught my eye, however, is that Information Technology also shot higher, posting a +2.05% performance for the week. Infotech has been neck-and-neck in competition with the Energy sector for months now. This past week saw a continued competition with Energy. Recent high-flying stocks were hit with a wave of profit-taking amid the continued volatility of crude oil. While Energy recovered some, Infotech took the lead once again.

The “echoes” I refer to can be seen in the charts below. It should be no surprise that Information Technology is the clear winner for 1-year performance at +29%. But look at the 5-year figure. The S&P 500 Infotech Index is up +145.6%! It makes looking at the sector’s day-to-day variance seem almost silly.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Further echoing strength of the past, look at the top 10 industry performers. Four out of the 10 reside in the Information Technology sector, but that’s not what interests me most. Look at the 5-year performance figures. Internet & Catalog Retail grew +432% in 5 years and an astounding +1,774% in 10 years.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If I tell you that daily performance swings seem like a waste of time, why do I spend so much time each week chronicling the weekly performances of the sectors? The truth is that the big (long-term) trends generate the most money. And the most money is made when people get in early. By looking at each week to see what sectors could develop into those monstrous sweeping trends, we have a better chance of being in on the ground floor when things get ready to blast off. Hats off to you if you were one of those lucky few who paid attention when Internet & Catalog Retail was the breakout industry 10 years ago.

Of course, we can look back now and say, “Well, of course, the big growth of the market was in Internet stocks! Look at the FAANG stocks!” But paying attention early, when a trend reveals itself, is why I scour the sectors each week. This could be the week that signals the next 10-year boom for a sector. It may even be Real Estate, even though I would say that’s unlikely, as the worst performing industry of all was Real Estate Management & Development (along with Energy Equipment & Services). Who really knows? No one does, but it pays to take heed. The next massive trend may just have gotten underway.

About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. *All content of “Sector Spotlight” represents the opinion of Jason Bodner*

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