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Tech sector changes & NIRP


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Tech sector changes & NIRP

David Kotok is the chairmanand chief investment officer of Cumberland Advisors. The views and opinionsexpressed in this piece represent only those of the author and not necessarilythose of S&P Global Market Intelligence.

We didsome realignment of our tech-sector holdings, as our clients know from theirportfolio reviews. The changes are nuances within the ETF strategy.

Wesold XLK. It is the classic large-cap sector spider for tech. XLK has ayear-to-date performance of about zero but is up about 9% from the February 8thlow. Its largest holdings at the end of April are:

1) Apple = 12.9%

2) Microsoft = 9.7%

3) Facebook = 6.6%

4) AT&T = 5.8%

5) Alphabet (google) = 10.9%(googl + goog)

Wehave owned 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 theFebruary low. Its largest holdings at the end of April are:

1) Motorola Solutions = 8.7%

2) Cisco = 8.5%

3) Palo Alto = 8.4%

4) QUALCOMM = 8.3%

5) Harris = 8.3%

Wealso launched a new position in FDN. It is down about 8% year-to-date but upabout 19% since the February low. Its largest holdings at the end of April are:

1) Facebook = 10.5%

2) Amazon = 10.4%

3) Salesforce = 5.2%

4) PayPal = 5.0%

5) Alphabet (google) = 9.4%(googl +goog)

Thetotal tech-sector weighting in the portfolio is only slightly changed; it isthe composition that is different. When all the weights are examined, it isclear that Apple and Microsoft are diminished while Facebook and Amazon areincreased. 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).

Clientsare already aware of these changes since they are able to see their portfoliochanges in real time. We do not publish changes or comments about them untilafter the fact and after clients' accounts are finished positioning.

Asfor the general stock market, we remain biased toward rising stock prices andsee the U.S. economy in a very slow and extended economic recoverycharacterized by low inflation, low interest rates and little financial stressor pressure.

TheFederal Reserve has affirmed a "go slow" policy. We expect one ormaybe two interest rate hikes this year. We see the year-end short-terminterest rate somewhere around 1% or a little lower. We see U.S. Treasury bondinterest rates in a tug of war. They are pulled lower because of the NIRPregimes that have now been expanded to about one-fourth of the global economy.They are pulled higher because the U.S. is in a mild PIRP regime, and the U.S.dollar zone is likewise about one-fourth of the world economy. The other halfof the world has a downward bias in interest rates and an upward bias inrecovering asset prices.

Thisis a good outlook for rising stock prices as a general theme. It also suggeststhat any upward movement in U.S. bond interest rates will be gradual, but thatis a guess. There is a growing risk, albeit still small, that the U.S. couldsee some rising inflation and increasing intensity of upward bond interest ratepressure. It is not clear how much or when that might occur.

Aspecial note on Japan is warranted, as that central bank disappointed marketexpectations by not changing its stated policy to a more stimulative mode.Markets reacted violently, with a major stock price selloff and a currencyshift from a weaker yen to a stronger yen. We still expect another round ofstimulative activity from the Bank of Japan, likely after the major meetings inMay and into the summer months.

Japanfaces issues including reconstruction of damage from the latest earthquake. Forthis purpose the Bank of Japan extended a special credit mechanism of loans tobanks at a zero interest rate. The markets ignored this action.

Theway we see it, the extension of credit to banks for longer-term financing at azero interest rate is stimulative. It makes no difference why it was done.Lending liberally at no interest cost is stimulative regardless of how themoney is used. If it is used for rebuilding after a natural disaster, it isstimulative. If it is used some other way it is still stimulative. Long termborrowing from a central bank at zero interest rate is stimulative; it is asimple as that.

InEurope, Mario Draghi is going to launch the first in a series of longer-termlending tranches at a zero interest rate in June. That action, too, will bestimulative. And it will be large in size. Remember, if you discount anythingat a zero for a very long time, the math leads you to a near infinity assetprice. The Draghi plan contemplates four year, zero interest rate loans tobanks in the 19-country eurozone.

So,Japan is lending long-term at zero. Eurozone's 19 countries are long-term atzero. Switzerland, Sweden, Denmark and Hungary are involved in their versionswith 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 pursuingthis policy. We can only speculate what things will look like two years fromnow.

Insum, we are biased toward maintenance of a fully or nearly fully investedposition in stocks. We see an upward bias in stock prices. We see a prolongedperiod of very low interest rates. And we see more and more signs of risingvolatility, as one would expect to see in the present environment.