We did some realignment of our tech-sector holdings, as our clients know from their portfolio reviews. The changes are nuances within the ETF strategy.
We sold Technology Select Sector SPDR (NYSE:XLK). It is the classic large-cap sector spider for tech. XLK has a year-to-date performance of about zero but is up about 9% from the February 8th low. Its largest holdings at the end of April are:
- Apple (NASDAQ:AAPL) = 12.9%
- Microsoft (NASDAQ:MSFT) = 9.7%
- Facebook (NASDAQ:FB) = 6.6%
- AT&T (NYSE:T) = 5.8%
- Alphabet (Google) = 10.9% (NASDAQ:GOOGL + NASDAQ:GOOG)
We have owned iShares North American Tech-Multimedia Networking (NYSE:IGN) for some time and have rebalanced and added to that position. IGN has a year-to-date performance of about 3% and is up about 19% since the February low. Its largest holdings at the end of April are:
- Motorola Solutions Inc (NYSE:MSI) = 8.7%
- Cisco Systems Inc (NASDAQ:CSCO) = 8.5%
- Palo Alto Networks Inc (NYSE:PANW) = 8.4%
- Qualcomm Incorporated (NASDAQ:QCOM) = 8.3%
- Harris Corporation (NYSE:HRS) = 8.3%
We also launched a new position in First Trust Dow Jones Internet (NYSE:FDN). It is down about 8% year-to-date but up about 19% since the February low. Its largest holdings at the end of April are:
- Facebook = 10.5%
- Amazon (NASDAQ:AMZN) = 10.4%
- Salesforce.com Inc (NYSE:CRM) = 5.2%
- PayPal Holdings Inc (NASDAQ:PYPL) = 5.0%
- Alphabet (Google) = 9.4% (GOOGL +GOOG)
The total tech-sector weighting in the portfolio is only slightly changed; it is the composition that is different. When all the weights are examined, it is clear that Apple and Microsoft are diminished while Facebook and Amazon are increased. Please note that we have other ETFs that reach into the tech sector (which at Cumberland we define in the very broad sense of the term).
As for the general stock market, we remain biased toward rising stock prices and see the US economy in a very slow and extended economic recovery characterized by low inflation, low interest rates, and little financial stress or pressure.
The Federal Reserve has affirmed a “go slow” policy. We expect one or maybe two interest-rate hikes this year. We see the year-end short-term interest rate somewhere around 1% or a little lower. We see US Treasury bond interest rates in a tug of war. They are pulled lower because of the NIRP regimes that have now been expanded to about one-fourth of the global economy. They are pulled higher because the US is in a mild PIRP regime, and the US dollar zone is likewise about one-fourth of the world economy. The other half of the world has a downward bias in interest rates and an upward bias in recovering asset prices.
This is a good outlook for rising stock prices as a general theme. It also suggests that any upward movement in US bond interest rates will be gradual, but that is a guess. There is a growing risk, albeit still small, that the US could see some rising inflation and increasing intensity of upward bond interest rate pressure. It is not clear how much or when that might occur.
A special note on Japan is warranted, as that central bank disappointed market expectations by not changing its stated policy to a more stimulative mode. Markets reacted violently, with a major stock price sell-off and a currency shift from a weaker yen to a stronger yen. We still expect another round of stimulative activity from the Bank of Japan, likely after the major meetings in May and into the summer months.
Japan faces issues including reconstruction of damage from the latest earthquake. For this purpose the Bank of Japan extended a special credit mechanism of loans to banks at a zero interest rate. The markets ignored this action.
The way we see it, the extension of credit to banks for longer-term financing at a zero interest rate is stimulative. It makes no difference why it was done. Lending liberally at no interest cost is stimulative regardless of how the money is used. If it is used for rebuilding after a natural disaster, it is stimulative. If it is used some other way it is still stimulative. Long term borrowing from a central bank at zero interest rate is stimulative; it is a simple as that.
In Europe, Mario Draghi is going to launch the first in a series of longer-term lending tranches at a zero interest rate in June. That action, too, will be stimulative. And it will be large in size. Remember, if you discount anything at a zero for a very long time, the math leads you to a near infinity asset price. The Draghi plan contemplates four year, zero interest rate loans to banks in the 19 country euro zone.
So, Japan is lending long-term at zero. Euro-zone’s 19 countries are long-term at zero. Switzerland, Sweden, Denmark and Hungary are involved in their versions with their currencies. This totals one-quarter of the real output of the world. This is the spreading of NIRP. Two years ago, there were no central banks pursuing this policy. We can only speculate what things will look like two years from now.
In sum, we are biased toward maintenance of a fully or nearly fully invested position in stocks. We see an upward bias in stock prices. We see a prolonged period of very low interest rates. And we see more and more signs of rising volatility, as one would expect to see in the present environment.