The tech sector, which allowed Wall Street to emerge from the coronavirus-induced short bear market and form the new bull market, suffered a bloody blow right at the start of 2022. Record high inflation forced the Fed to go ultra-hawkish with tighter liquidity controls and a higher interest rate regime. Consequently, the carnage in the tech industry has continued to this day.
However, in the first five months of this year, the valuation of this sector has been revised significantly. Technology Select Sector SPDR (XLK) — one of the 11 broad sectors in the S&P 500 Index — is down 23.4% year-to-date. The tech-heavy Nasdaq Composite Index is down 27.9% year-to-date and is currently in a bear market.
Although the Fed is yet to signal a move away from its ultra-tight monetary policy, some Fed officials have recently adopted a relatively dovish tone. Minutes from the Fed’s November FOMC meeting show that a “substantial majority” of Fed officials are in favor of reducing the magnitude of future rate hikes.
The consumer price index and the producer price index came in lower than expected for October. Those two data along with the third quarter personal consumption expenditure (PCE) price index – the Fed’s preferred measure of inflation – have suggested that peak inflation may be behind us.
As a result, the Fed is likely to relax its tighter monetary policy controls. The central bank is expected to taper the magnitude of the rate hike from the December FOMC meeting. This will help the overall stock market.
The FOMC minutes read: “A number of participants noted that it would be appropriate to slow the pace of the increase in the target range for the federal funds rate as monetary policy approaches an stance that is sufficiently restrictive to meet the targets of the federal funds rate.” committee.”
Technology is the best choice in the long run
The recent collapse of the technology sector is a temporary phenomenon. The fundamentals of this sector are rock solid. We must not forget that the growing demand for high-tech products in an otherwise difficult environment has been a catalyst for the industry. A series of breakthroughs in 5G wireless network, cloud computing, predictive analytics, AI, self-driving vehicles, digital personal assistants and IoT have given a boost to the entire space.
Tech Has Huge Potential – Buy from Dip
The leading emerging economies in Asia, Latin America, Africa and some European countries still lag far behind the developed world in adopting digital technology. While mobile phone penetration in these countries is close to 90%, a large number of people are still using phones with legacy features because voice communications, not data communications, cover the majority of their needs. Even those who use smartphones rarely use online digital features.
However, the outbreak of the coronavirus quickly changed the lifestyle and appearance of these people. People were not fully used to digital platforms for their office work (work from home), ordering groceries and other daily needs, or transferring money and making payments. In addition, online training, video conferencing and virtual networking have now become indispensable.
The more digitized countries were able to minimize their losses during the pandemic. These are important lessons for other countries. Even those who are less fond of digital technologies and online platforms, whether because they have to learn with smartphones or tablets or because they are afraid of data theft, are now feeling the massive advantage of online platforms.
On August 9th, President Joe Biden signed the CHIPS Act of 2022 into law. This legislation will provide $52 billion to help computer chip makers alleviate shortages of components vital to a range of industries.
The Biden administration has expressed concern that the United States accounted for 37% of world semiconductor and microelectronics production in 1990, which has fallen drastically to just 12%. Consequently, US companies, particularly the auto and high-tech industries, are suffering from an acute shortage of chipsets due to the collapse of the global supply chain during the pandemic.
Chip manufacturers are happy to benefit from this stimulus Analog Devices Inc. (ADI – free report) Texas Instruments Inc. (TXN – free report) GLOBALFOUNDRIES Inc. (GFS – free report) Lattice Semiconductor Corp. (LSCC – Free report) and ON Semiconductor Corp. (ON – free report).
These stocks have posted double-digit returns over the past month. GLOBALFOUNDRIES and Lattice Semiconductor have a Zacks Rank #2 (Buy). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks can be found here.
Image source: Zacks Investment Research