The technology sector, which enabled Wall Street to shake off a brief coronavirus-induced bear market and form a new bull market, is taking a bloody blow as 2022 begins. Record high inflation forced the Fed into hyper-aggression with tighter liquidity controls and a higher interest rate regime. As a result, the carnage in the technology sector continues to this day.
However, the sector’s valuation has improved significantly in the first five months of this year. The Technology Select Sector SPDR (XLK) — one of 11 broad sectors of the S&P 500 Index — is down 23.4% year-to-date. The technology-heavy Nasdaq Composite Index is down 27.9% year to date and is currently in a bear market.
While the Fed has so far shown no signs of moving away from its ultra-aggressive monetary policy, some Fed officials have recently spoken out in a relatively aggressive tone. The minutes of the Fed’s November FOMC meeting showed that a “substantial majority” of Fed officials are in favor of reducing the magnitude of further rate hikes.
The Consumer Price Index and the Producer Price Index for October were lower than expected. These two figures, along with the personal consumption expenditure (PCE) price index – the Fed’s favorite inflation measure – indicated for the third quarter that peak inflation may be behind us.
As a result, the Fed is likely to loosen its tight monetary controls. The central bank is expected to taper the size of rate hikes ahead of December’s FOMC meeting. This will benefit the overall stock market.
The FOMC minutes stated, “Many participants noted that since monetary policy took a stance restrictive enough to meet the committee’s goals, the pace of increases in the target range for the federal funds rate would be limited. ” It would be wise to slow down.”
Technology is the best long-term choice
The recent slowdown in the technology sector is a temporary phenomenon. The foundations of this sector are very strong. Let’s not forget that growing demand for high-tech products has been a catalyst for the industry in an otherwise challenging environment. A series of breakthroughs in 5G wireless networks, cloud computing, predictive analytics, AI, self-driving vehicles, digital personal assistants and the Internet of Things have fueled the overall space.
Technology has huge potential – Buy on the dip
Major emerging markets in Asia, Latin America, Africa and some European countries are still lagging behind in digital technology adoption compared to the developed world. Although the mobile phone penetration rate in these countries is around 90%, a large number of people still use phones with older features as voice communication and data do not meet most of their needs. Even those who use smartphones rarely use online digital facilities.
However, the coronavirus outbreak quickly changed the lifestyle and appearance of these people. People were not yet completely addicted to digital platforms for their office work (working from home), ordering food and other daily necessities or transferring and paying money. In addition, online education, video conferencing and virtual networking have now become essential.
Countries that are more digitized have been able to reduce their losses during the pandemic. These are important lessons for other countries. Even people who are less inclined towards digital technology and online platforms, either because they have learned to use smartphones or tablets or for fear of data theft, are now realizing the huge benefits of online platforms.
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On August 9, President Joe Biden signed the CHIPS Act of 2022 into law. The legislation would provide $52 billion to help computer chip makers and reduce shortages of critical components for a range of industries.
The Biden administration has expressed concern that the United States, which had a 37% share of global semiconductor and microelectronics production in 1990, has fallen to just 12%. As a result, US companies, especially the automotive and high-tech industries, are suffering from an acute shortage of chipsets due to the breakdown of global supply chains during the pandemic.
Chipmakers will benefit from this stimulus analog devices inc. etc, Texas Instruments Inc. txn, Global Foundries Inc. girlfriends, Lattice Semiconductor Corp. LSCC and ON Semiconductor Corp. Resilience.
These stocks have delivered double-digit returns over the past month. GlobalFoundries and Lattice Semiconductor have the Zacks Rank #2 (Buy). you can see Full list of current Zacks #1 ranked (strong buy) stocks here,
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