Globe Investor
 

January 27, 2022

 
Is tech’s market leadership over? Plus, why meme stocks lost their mojo, and the fascination over Pelosi’s portfolio
 

Dado Ruvic/Reuters

Is tech’s market leadership over? Plus, why meme stocks lost their mojo, and the fascination over Pelosi’s portfolio - A roundup of investment ideas for active investors
Investors have become accustomed to equity benchmark performance dominated by a few mega cap stocks, as I discussed earlier this month. Importantly, however, things might be changing with cheaper, smaller cap, inflation-friendly market sectors replacing technology stocks as market leaders.
 
In conventional market capitalization weighted indices, changes in the stock price of Royal Bank of Canada affect S&P/TSX Composite Index benchmark returns 100 times more strongly than an equal percentage move in Cronus Group because of their relative size. In the less widely followed equal-weighted indexes, price moves in all stocks affect returns equally.
 
In a Wednesday research report, Scotiabank strategist Hugo Ste-Marie noted that average valuation levels for the S&P 500 equal weighted index have dropped to the historical average near 16 times. The market cap weighted S&P 500 still features a forward price-to-earnings ratio of 19.4 times, well above the long-term average of 15.5 times.
 
 
 
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So far in 2022, the equal weight S&P 500 has outperformed the conventional benchmark by 2.4 percentage points.
 
It is not, importantly, a foregone conclusion that the equal weighted index will continue to outperform the market cap weighted benchmark just because it is more attractively valued.
 
On the other hand, the technology stocks that dominate the cap weighted index benefitted from the low interest rate, slower growth environment of the past decade. The lack of profit growth outside of technology motivated investors to pile into a small number of tech giants that consistently generated strong year over year earnings growth.
 
Technology stocks are less well suited to the inflationary environment with rising interest rates that is expected in the coming months. Inflationary backdrops favour economically sensitive market sectors like energy, materials and consumer discretionary that have lagged over the past decade.
 
Changes in sector leadership can be painful for portfolios. The previous winners fade and new sectors, likely underweighted in most portfolios, outperform the benchmark as a whole. These investing environments provide more opportunity for active fund managers that can take advantage, and returns for market cap weighted index-tracking funds often stagnate.
 
The relative returns of cap weighted versus equal weighted benchmarks will offer key investor insights this year. Further outperformance by equal weighted benchmarks would signal an important change in performance leadership
 
-- Scott Barlow, Globe and Mail market strategist
 
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The Rundown
 
How the COVID bump collapsed – and why it echoes the cannabis crash
 
Forget everything you learned about investing in the past year. Last January, when meme stocks such as GameStop Corp. and BlackBerry Ltd. were soaring, retail traders who swapped investing ideas on Reddit message boards were talked about as the future of finance. Unprofitable growth stocks were some of the hottest investments to own, especially in the tech sector. And the more money a company lost, the more likely its stock would soar. Resource companies, meanwhile, were dead in the water because investors had embraced ESG principles. For investors, the opposite philosophy is true today: Tech stocks are in the tank, resource companies rule and retail traders aren’t nearly the force they were made out to be. So what happened? Tim Kiladze explains.
 
The TSX earnings season is underway: Here’s what to expect and what sectors will profit the most
 
Canada’s fourth-quarter earnings season is underway with high expectations for resource companies amid surging commodity prices and more headwinds anticipated among consumer names impacted by inflation and pandemic lockdowns. Brenda Bouw reports on how rising prices and supply chain setbacks will again be common themes in Canadian corporate earnings reports in the weeks ahead.
 
U.S. small cap stocks may be signaling market bottom
 
As the small cap Russell 2000 hovers near bear market territory, some strategists are optimistic the index and U.S. stock market may be close to a bottom for the recent sell-off.
 
Fed tightening a sign to get the ‘heck out’ of U.S. stocks
 
U.S. stock markets, after enjoying their best three-year run in more than two decades, may soon have to cede the top spot. With the Fed preparing to raise interest rates for the first time in almost four years, capital is starting to fan out of rate-sensitive U.S. shares into other parts of the world where markets are cheaper and potentially more resilient.
 
U.S. House speaker Nancy Pelosi’s stock trades attract growing following online
 
A year since a Reddit-driven retail trading frenzy rocked the markets and created the ‘meme stock’ phenomenon, leading U.S. lawmaker Nancy Pelosi’s investments have become a meme in their own right. Google searches for ‘Pelosi stock trades’ hit a record high earlier this month as users on social media platforms including Twitter, Reddit, Youtube and TikTok scrutinize her investments, believing the U.S. Speaker of the House may have an edge on Wall Street.
 
Others (for subscribers)
 
Wednesday’s analyst upgrades and downgrades
 
Tuesday’s analyst upgrades and downgrades
 
Tuesday’s Insider Report: CEO buys this rallying stock with a further 53% gain forecast
 
Number Cruncher: Nine growing mid-cap stocks with sustainable dividends
 
Globe Advisor
 
Inflation, transition to net-zero to boost renewable energy in 2022
 
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What’s up in the days ahead
 
David Berman will share his thoughts on tech stocks and John Heinzl tackles the thorny topic of “phantom” distributions.
 
Click here to see the Globe Investor earnings and economic news calendar.
 
More Globe Investor coverage
 
For more Globe Investor stories, follow us on Twitter @globeinvestor
 
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
 
Compiled by Globe Investor Staff
 
 
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