U.S. stocks ended mostly lower on Friday and for the week, as investors sold a key group of highly-appreciated NASDAQ technology shares after a Goldman Sachs report warned that low volatility momentum in the group may have blinded shareholders to valuation risks. This was followed by a similar report from Bank of America Merrill Lynch warning that active large-cap mutual funds had increased their technology sector exposure by the largest margin ever. The NASDAQ 100 sank 2.4% on Friday, trimming an intra-day loss that had reached 3.8%, while the Philadelphia Stock Exchange Semiconductor Index slumped 4.2%. Despite the steep slide in technology stocks, energy and financial company shares rallied, and the Dow Industrials and the Russell 2000 Index of small cap stocks both closed at new fresh all-time highs. In a new milestone, the current S&P 500 bull market has run for 99 months (8 years and 3 months) as of Friday, the second-longest bull market in history.
For the week, the S&P 500 ended two week of gains, falling -0.27%, the Dow Industrials climbed by +0.31% and the MSCI EAFE (developed international) retreated -1.17%.
What We’re Reading
Tech Stock Selling Blindsides Investors -- Bloomberg
Even Odds for Another U.K. Election This Year -- Marketwatch
Brace for Up to Two More Rate Hikes -- Bloomberg
Chart of the Week: Real Estate – A Defensive Haven Among Rising Rates
Real Estate Investment Trusts (REITs) were removed from financials and became their own sector within the S&P 500 in September of last year. Since then, the sector has fallen 0.5%. It has underperformed the broader S&P 500 Index and is one of only three major sectors that have recorded declines since September 2016. Real Estate remains defensive in nature and offers a better-than-average yield of 3.3%. While funds have flowed out of the sector in the last month, year-to-date the REIT sector has had the second-largest inflows, with $2.2B added to U.S. equity ETF funds according to State Street Global Advisors. Technology is the only sector with more inflows year-to-date. Moreover, investing in dividend paying strategies has historically been a safer bet over the long-term.
As Chart 1 illustrates, history shows that the REIT sector has not only appreciated as interest rates were increased, but also gained more than the S&P 500 as rates rose. Admittedly, REITs were only added to the index in 2001, so we only have data for one instance of rising interest rates. Yet from June 2004 to June 2006 the Federal Funds rate’s upper boundary increased each quarter from 1% (in March 2004) to 5.25%. During that period, the REITs sector increased 37%, while the S&P 500 increased 13%.
Some materials are chosen by the Cetera Investment Management team and summarized by Jason Vitucci who is not affiliated or registered with Cetera. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Cetera Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.