
CIG Asset Management Update: Technology Bubble 2.0?
Summary:
* The performance ratio of the S&P 500 Information Technology Sector to the S&P 500 has hit an all-time high.
* Market returns after hitting these levels have not been favorable in the past.
Commentary:
The performance ratio of the S&P 500 Information Technology Sector to the S&P 500[i] (the blue line on the above chart) has hit an all-time high of 0.66. The ratio’s previous all-time high was set in March 2000 at 0.64. As we previously discussed in What If the Bubble Bursts?, from March 27, 2000 (a) to October 9, 2002 (b) the S&P 500 (black line) fell -49% and then it took over 7 years to recover its losses after the peak. This same ratio hit 0.64 again on December 27, 2021 (c) and was followed by a -25% drawdown in the S&P 500 through October 10, 2022. (d) Now, as of May 15, 2023, this important ratio has hit a new all-time high of 0.66. (e)[ii] Will history repeat? Are we currently in a second massive technology bubble? No one knows for sure – but we are very cautious.
The rally thus far year-to-date has been narrow and concentrated in a few names. Six S&P 500 stocks – Apple, Microsoft, Nvidia, Alphabet, Amazon, and Meta – have contributed 90% of the gains of the overall index year-to-date through May 18, 2023.[iii] Five of these stocks are working on incorporating artificial intelligence (A.I.) into their business models and product offerings. While A.I. could be disruptive in the long run, the euphoria in anything A.I.-related reminds us of 1999, when many of the dot-com stocks soared in value with the internet as we know it now was still in its infancy.
Consequently, we continue to attempt to optimize our client’s exposure to the information technology sector in our pursuit of navigating our clients’ investments through these potentially turbulent market conditions. It is impossible to predict where these developments will lead, of course, but periods of upheaval can create opportunities for transformative change. We stand ready to possibly increase our allocation to domestic equities should the market rally broaden out to other sectors that have not kept up with the mega-cap growth stocks that have led year-to-date thus far. If we experience a significant market drawdown, then great opportunities could exist in the market which we would endeavor to evaluate and potentially participate in.
While volatility has moved lower over the course of 2023[iv], we do not expect that to persist for the remainder of the year. Therefore, we continue to stay the course of risk-balanced investing. We remain focused on striking the right aggressiveness versus defensiveness in client portfolios given the evolving uncertainty in the markets, the economy, and geopolitics.
Please reach out to Brian Lasher (BLasher@cigcapitaladvisors.com), Eric T. Pratt (EPratt@cigcapitaladvisors.com) or the rest of the CIG team if you have any questions.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] The ratio of index values (i.e., the S&P 500 Information Technology Index divided by the S&P 500 Index) indicates the relative performance of Information Technology to the overall S&P 500 Index. Source: Calculated by CIG from data obtained from finance.yahoo.com.
[ii] Calculated by CIG using data obtained from finance.yahoo.com
[iii] SentimenTrader / Bloomberg
[iv] Calculated by CIG using data on the CBOE Volatility Index, from finance.yahoo.com
Image: Gerd Altmann/Pixabay

CIG Asset Management Update: Are We Experiencing Another “Bear Market Rally”?
Summary:
* Equities bounced in October following September’s drawdown.
* Zooming out: The journey from where we were to where we are versus where we hope to be
* Defining Bear Market rallies
October 2022 Returns:
Commentary:
Domestic stocks bounced in October, with the S&P 500 gaining +8.1% after September’s -9.2% drawdown.[ix] Fixed income lost -1.3% as measured by the Bloomberg U.S. Aggregate Index.[x] International Equities in developed markets gained +5.4%[xi], while Emerging Market Equities lost -3.1%.[xii]
We believe it is important to zoom out to gain a greater perspective and look at the journey the stock market, as measured by the S&P 500, has taken since early-2020 through to early-November 2022, focusing on several timeframes in the chart below. The market was at an all-time high in February 2020, (A), just before Covid-19 lockdowns shook the global economy. The market then fell 33% until it bottomed out on March 23, 2020, (B). The market then steadily rallied to a new all-time high from the Covid-19 low to January 3, 2022, (C), as central banks worldwide intervened and provided massive liquidity through quantitative easing and low interest rates. Ever since the market hit its all-time high in early-January of this year, it has traded in a channel of successively lower highs and lower lows.[xiii]
Is it possible we are currently experiencing the third Bear Market rally since the all-time high in January 2022? Bear Market rallies have been defined as significant counter trend recoveries that can last as briefly as a few weeks to as long as several months before the market reverses course to a new low. The chart below serves to illustrate the concept of a Bear Market rally.
Source: Barchart.com
While we are encouraged by the stock market’s resilience seen from October into early-November, equities are historically expensive. The total market capitalization of U.S. stocks currently is 153% of U.S. gross domestic product (GDP), almost the same level as the 157% dot-com peak in March 2000, which was right before that bubble burst.[xiv] One overvalued stock, for example, is Apple, Inc. (AAPL). Apple’s stock soared +8% after it reported its recent quarterly earnings results as being slightly better than expected. Apple beat Wall Street analysts’ earnings expectations because of its iMac sales while both its services and iPhone sales disappointed. Apple CEO Tim Cook explained that “silicon-related wafer supply constraints were not significant in the quarter” (microchip shortages ended), and it allowed the company to satisfy back orders and “fill the channel” at resellers and retailers. Between 2008 and 2016, Apple’s price-to-earnings ratio was in a range of 10 to 17 and its compounded annual earnings per share growth rate over that same period was 30%.[xv] Now, it trades at more than 24 times earnings, with analysts expecting only 3% growth in 2023![xvi] Many other technology stocks are similarly overvalued on a historic basis.
We reduced exposure to technology stocks in October in our actively managed strategies before earnings were announced and just recently added back technology exposure in three targeted areas that are all down significantly from their highs: cloud computing, semiconductors, and cyber security.
Year-to-date (through to 10/31/2022), our CIG Dynamic Growth Strategy composite has avoided approximately 44% of the losses of the growth benchmark, and the CIG Dynamic Balanced Strategy has avoided approximately 59% of the losses of the balanced benchmark.[xvii]
We would welcome the opportunity to engage with you — via voice or email — to discuss your questions, and market challenges and opportunities, as well as the benefits of active investment management.