A shortened week for stocks is coming to a close, with U.S. investors off Friday and much of Europe out of action as well. While many eyes will turn to the Pinterest and Zoom initial public offerings, part of a strong run of tech IPOs recently, most of the attention will fall on the Justice Department’s release of the redacted Mueller report into U.S. President Donald Trump and Russia.
Our call of the day comes from Credit Suisse Global Head of Equity Strategy Andrew Garthwaite and his team, who produced a remarkable finding in a note to clients earlier this month: Technology stocks, long viewed as the textbook definition of a cyclical sector, actually have many of the attributes typically found as part of a defensive strategy — particularly their vast holdings of cash.
The debate over whether tech stocks will fall when the economic cycle turns to contraction, and businesses and consumers pull back on spending, has heated up in recent years.
Read: Why some investors say tech stocks are becoming less risky
“Despite having above-average exposure to the cycle,” Garthwaite wrote, “the tech sector appears to have elements of ‘the best of both worlds’ and is implicitly defensive to some degree.”
The first area where tech shines is, unsurprisingly, in growth. Garthwaite showed that sales growth for U.S. technology companies has been 5 to 10% higher than that of the overall market for years. He expects growth will continue on the back of developments such as the rise of 5G cellular networks and unlimited data plans, more semiconductor chips in autos, improvements in battery life disrupting numerous industries, and even more activity in online shopping.
More strikingly — particularly for readers who bear the scars of the March 2000 tech bust — Garthwaite argued that tech has defensive qualities. For one, he pointed out that tech companies have more cash on hand than nearly every other sector. “The tech sector is the only sector globally to have net cash,” he writes. “This is an important advantage at a time when we believe the credit spreads are likely to rise.”
Secondly, Garthwaite noted that while a tight labor market and the threat of wage increases in the U.S. broadly presents a threat to corporate profitability, “tech has the advantage of employing very few people relative to the size of the companies, making the sector much more resilient to rising wages.”
Many investors are deeply sceptical that stocks of companies that make seemingly ephemeral products like software, will hold up in a slump that forces consumers to tighten their belts and companies to slash spending. Garthwaite’s favored software names such as Microsoft, SAP and Oracle are arguably insulated in such a scenario because they can help drive efficiencies in cost-cutting. He cites the fact that SAP’s oil and gas-related business “had its strongest quarter when the oil price fell below $30 per barrel. SAP explained that when times are tough economically, corporates have to cut procurement costs, automate procedures and improve back-office efficiencies, and software can deliver all of these things.”
Read: Which markets are closed on Good Friday
The market
The major index futures are all pointing downwards before Thursday’s open. The Dow US:YMH9 is set to fall 0.3%, S&P 500 US:ESH9 futures indicate a 0.2% drop and the Nasdaq US:NQH9 is also pointing down 0.2%. Wednesday’s session saw the S&P 500 end down 0.2% at 2,900.4, the Nasdaq flat at 7,996.1 and the Dow also flat at 264.5.
The dollar DXY, +0.28% was up 0.24% Thursday. Gold US:GCU8 rose to $1,279.3/oz, up 0.2$. Crude oil US:CLU8 dipped 0.1% to $63.69/barrel.
Much of Europe is closed, but the FTSE 100 UKX, -0.09% is trading down 0.4% following a softer session in Asia, where the Hang Seng was down 0.5% and Japan’s Nikkei 225 fell 0.8%.
The chart
Is the Fed’s inability to normalize inflation an accident, or a choice? Our chart of the day comes from David Beckworth, senior research fellow at the Mercatus Center at George Mason University, former U.S. treasury economist and blogger/podcaster at Macro Market Musings. Beckworth argues that the reason the Fed has not been able to go above its 2% inflation target for years is that this was the inevitable outcome of the policy choices they have made:
“One does not get a decade of trend inflation that is below target by accident. Instead, revealed preferences tell us inflation is where it is because the FOMC allowed it to be there. Put differently, the Fed has chosen not to fully offset the shocks and secular forces listed above that have pushed inflation down.”
He cites two factors to support his argument. Firstly, the Fed’s own Summary of Economic Projections - a measure of the outcomes of a set of ideal policies proposed by committee members - which shows that their ideal over time would produce a rate below 2%. Second, he links to a San Francisco Fed study of the central bank’s transcripts, meeting minutes and members’ speeches, from 2000-2013.
Macro Market Musings
Beckworth’s chart shows that, compared to the 30 years before the financial crisis, aggregate demand (represented by nominal expenditures, or nominal GDP less inventories) has been far lower than historical trends suggest they ought to be.
The buzz
We’ll get earnings news from insurer Travelers TRV, -1.79% , and tobacco giant Philip Morris PM, -0.85%
A pair of IPOs will be in focus as image board Pinterest PINS, +0.00% and videoconferencing company Zoom Video Communications ZM, +0.00% are set to list. Pinterest priced its IPO at $19 a share, above its previously targeted range of $15-$17. Zoom also priced higher than its original projections — here are five things to know about the company.
American Express AXP, -0.11% shares fell in pre-market trading on first quarter earnings that the credit card company beat on earnings but disappointed on revenue.
The economy
It’s a big day for data, with weekly jobless claims, retail sales and the Philly Fed index of business sentiment all coming ahead of the market’s open. After that, we’ll get the Markit manufacturing and services purchasing managers indexes, followed by business inventories data and leading indicators.
The quote
“In the beginning, it’s contracts and lawyers and stuff, but then we move to cat emojis.” — Workers are finding that as texting spreads to the workplace, gaffes and awkwardness have come along for the ride, the Wall Street Journal reported Thursday.
The tweet
fender forges 3 game of thrones guitars: stark telecaster, targaryen stratocaster, and lannister jaguar https://t.co/DVKN3Uv1jC pic.twitter.com/YUiASelxZ7
— designboom (@designboom) April 18, 2019
Choose your tribe: Fender guitars celebrates the hit HBO show’s final season.
Random reads
The kids are alright renting nine-bedroom Vancouver mansions with steam rooms for practically nothing
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Your time will come, warns the FT’s Michael Skapinker, who is unimpressed by young people who can make it through long flights without having to go pee
The headline on this story about Prince Harry having a bee in his bonnet is not meant literally
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