Market reacts as tech takes data shot on the chin

E*TRADE Securities2

03/29/18

So goes tech. So, it seems, goes the market. While true of many sectors, the S&P 500® Technology sector’s correlation with the S&P 500 Index, i.e., a measure of how they move relative to one another, is a high 0.89 over the past 12 months.1 Recently tech has had its struggles. Not surprisingly, the market has too.

Market observers point to several factors likely contributing to tech’s slide. For one, the Trump administration announced tariffs on imports from China, in part to reduce future Chinese investments in US technologies, such as semiconductors and 5G wireless communications. Investors also appeared to “unlike” news of Facebook mishandling personal information from as many as 50 million user accounts.

That development seemed to renew talk of more stringent privacy regulations for social user information generally.

S&P 500 sector weightings, 3/28/18

Source: FactSet

Consumer privacy in the spotlight

The US Federal Trade Commission (FTC) responded to the Facebook fray by opening a non-public investigation into the social behemoth’s privacy practices. Reportedly, the investigation will focus on whether Facebook violated terms of a previous consent decree about how it handled personal user data. What gained attention last week was data transferred to political consulting firm Cambridge Analytica, which misappropriated data from Facebook users in political ad targeting during the 2016 election.

“The FTC is firmly and fully committed to using all of its tools to protect the privacy of consumers,” according to Tom Pahl, the acting director of the FTC’s Bureau of Consumer Protection. 2

Several prominent industry leaders seemed to agree with that sentiment, including Apple’s Tim Cook. He spoke of stronger privacy regulations that prevent data from being misused, saying that some “well-crafted regulation” is probably necessary.3

A potential regulatory template

Speculation on what regulation would look like seems premature, though interested investors may want to look toward Europe to see an example of where regulation is headed.

The new EU General Data Protection Regulation (GDPR) is set to go into effect in May. The GDPR will “harmonize data privacy laws across Europe, to protect and empower all EU citizens data privacy and to reshape the way organizations across the region approach data privacy.”4 Under the GDPR, consent to collect personal information will have to be more explicit and companies will have to be more transparent about their plans for that information. Violations for noncompliance could be costly, including fines of up to 4% of a company’s annual global revenue.

That would seem to be strong incentive for companies to get their GDPR strategies in order. Google may have provided an early roadmap for others to follow. The tech giant plans to collect consent directly from European users on its own properties. But for third-party websites and apps, Google would ask web publishers that use its ad technology to obtain user information on its behalf.5

Technology throws its weight around

At approximately 25%, the technology sector’s weighting is the S&P’s largest, by far. So any developments that may lead to regulation of some of its key constituents are likely to have wide ranging market implications.

Recently trading at a robust 11% premium to the S&P, the technology sector has been a star of this bull market. According to financial data company FactSet, the sector has a total net return of roughly 150% over the last five years.6 But investors who have grown accustomed to that type of performance may want to check their tech holdings in the face of what could be rising headwinds. 

 

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1. Morningstar Direct. S&P 500® Information Technology Index: sector correlation matrix. Retrieved 28 Mar. 2018 from Morningstar database.  

2. Forden, Sara. “FTC Confirms Facebook Probe Over Privacy Practices,” Bloomberg, 26 Mar. 2018. https://www.bloomberg.com/news/articles/2018-03-26/ftc-says-it-has-an-open-non-public-probe-on-facebook-practices-jf8ckbp0

3. “Apple, IBM chiefs call for more data oversight after Facebook breach,” Reuters, 26 Mar. 2018. https://www.reuters.com/article/us-china-forum-data/apple-ibm-chiefs-call-for-more-data-oversight-after-facebook-breach-idUSKBN1H20JU

4. EU General Data Protection Regulation, https://www.eugdpr.org

5. O’Reilly, Lara. “Google Wants Publishers to Get Users’ Consent on Its Behalf to Comply With EU Privacy Law,” The Wall Street Journal, 22 Mar. 2018. https://www.wsj.com/articles/google-wants-publishers-to-get-users-consent-on-its-behalf-to-comply-with-eu-privacy-law-1521749003

6. FactSet Research Systems, Inc. S&P 500® Index: total return. Retrieved 28 Mar. 2018 from FactSet database.


Index definitions

The S&P 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the US stock market. All components of the S&P 500 are assigned to at least one of eleven S&P Select Sector Indexes, which track major economic segments and are highly liquid benchmarks. Stock classifications are based on the Global Industry Classification Standard.