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Technology Sector is in Red YTD - Can It Revive in 2021?
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Wall Street performed impressively in the last two years, defying the trade-related tussle between the United States and China in 2019 and the global outbreak of an unprecedented pandemic caused by the novel coronavirus in 2020. U.S. stock markets remained green year to date as we are approaching the end of the first quarter.
However, the pattern of investing has changed in 2021. While the growth-oriented technology sector was the predominant driver behind the last two years' rally, cyclical sectors like consumer discretionary, industrials, materials, financials and oil-energy are the main sources of Wall Street's northbound journey year to date.
Notably, the Technology select sector SPDR (XLK), one of the 11 broad sectors of the market's benchmark S&P 500 Index, is the biggest loser and currently in the red year to date. This is in sharp contrast to last year when the technology sector had soared 43.6% and helped Wall Street to exit the coronavirus-led short bear market and form a new bull market.
Why Technology Disappoints Year To Date?
First, the government has intensified nationwide deployment of COVID-19 vaccines and the three FDA approved vaccine manufacturers have ramped up productions. With the possibility of faster-than-expected reopening of the U.S. economy, the focus has once again to cyclical stocks. that are trading at cheap prices.
On Mar 19, the Wall Street Journal reported that, U.S. restaurant and hotel bookings, as well as air ticket sales, have increased considerably in the month. Americans are spending more on gyms, salons and spas in recent weeks than they have since the start of the pandemic.
Second, Wall Street's astonishing rally for the past year prompted investors to shift the allotment of funds from safe-haven government bonds to risky equities. Consequently, yields on the 10-Year U.S. Treasury Note and 30-Year U.S. Treasury Note have spiked. Notably, the yield on 10-year bond has increased to an alarming 1.75% last week and is currently hovering around 1.6%.
High risk-free return is detrimental to high-growth industries like technology. Most of the growth companies depend on easy borrowing at cheap rates. A higher market interest rate will raise their cost of projects. As a result, market participants have started to reallocate their funds to cyclical stocks from growth stocks.
Technology is the Best Bet in the Long Term
The logic that the technology sector will underperform other cyclical sectors may be true for a short period of time but in the long term, technology stocks will remain the best bets. We must not forget that the growing demand for hi-tech superior products has been a catalyst for the sector in an otherwise tough environment.
A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, have given a boost the overall space.
Vast Under-Penetration of Digitization in Emerging Markets
Leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared with the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features, since voice communication and not data served most of their needs. Even those, who are using smartphones, rarely utilize online digital features.
However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. People were not entirely used to digital platforms for doing office work (work from home), ordering foods and other daily needs or transferring money and making payments. Moreover, online schooling, video conferencing and virtual networking have now become essential.
The countries that are more digitized have been able to minimize their losses during the pandemic. These are major lessons to the other countries. Even those who are less inclined toward digital technology and online platforms, either because they have to learn using smartphones or tablets or due to fear of data theft, are now enjoying the massive advantage of online platforms.
Stocks in Focus
The technology sector is indispensable and the reopening of the U.S. and global economies will only act as positive catalyst for this sector. Major technology stocks that are set to perform well in near future are Apple Inc. (AAPL - Free Report) , Microsoft Corp. (MSFT - Free Report) , NVIDIA Corp. (NVDA - Free Report) , Micron Technology Inc. (MU - Free Report) , Texas Instruments Inc. (TXN - Free Report) , Applied Materials Inc. (AMAT - Free Report) and Analog Devices Inc. (ADI - Free Report) .
The chart below shows the preice performance of seven above-mentioned stocks year to date.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Image: Bigstock
Technology Sector is in Red YTD - Can It Revive in 2021?
Wall Street performed impressively in the last two years, defying the trade-related tussle between the United States and China in 2019 and the global outbreak of an unprecedented pandemic caused by the novel coronavirus in 2020. U.S. stock markets remained green year to date as we are approaching the end of the first quarter.
However, the pattern of investing has changed in 2021. While the growth-oriented technology sector was the predominant driver behind the last two years' rally, cyclical sectors like consumer discretionary, industrials, materials, financials and oil-energy are the main sources of Wall Street's northbound journey year to date.
Notably, the Technology select sector SPDR (XLK), one of the 11 broad sectors of the market's benchmark S&P 500 Index, is the biggest loser and currently in the red year to date. This is in sharp contrast to last year when the technology sector had soared 43.6% and helped Wall Street to exit the coronavirus-led short bear market and form a new bull market.
Why Technology Disappoints Year To Date?
First, the government has intensified nationwide deployment of COVID-19 vaccines and the three FDA approved vaccine manufacturers have ramped up productions. With the possibility of faster-than-expected reopening of the U.S. economy, the focus has once again to cyclical stocks. that are trading at cheap prices.
On Mar 19, the Wall Street Journal reported that, U.S. restaurant and hotel bookings, as well as air ticket sales, have increased considerably in the month. Americans are spending more on gyms, salons and spas in recent weeks than they have since the start of the pandemic.
Second, Wall Street's astonishing rally for the past year prompted investors to shift the allotment of funds from safe-haven government bonds to risky equities. Consequently, yields on the 10-Year U.S. Treasury Note and 30-Year U.S. Treasury Note have spiked. Notably, the yield on 10-year bond has increased to an alarming 1.75% last week and is currently hovering around 1.6%.
High risk-free return is detrimental to high-growth industries like technology. Most of the growth companies depend on easy borrowing at cheap rates. A higher market interest rate will raise their cost of projects. As a result, market participants have started to reallocate their funds to cyclical stocks from growth stocks.
Technology is the Best Bet in the Long Term
The logic that the technology sector will underperform other cyclical sectors may be true for a short period of time but in the long term, technology stocks will remain the best bets. We must not forget that the growing demand for hi-tech superior products has been a catalyst for the sector in an otherwise tough environment.
A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, have given a boost the overall space.
Vast Under-Penetration of Digitization in Emerging Markets
Leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared with the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features, since voice communication and not data served most of their needs. Even those, who are using smartphones, rarely utilize online digital features.
However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. People were not entirely used to digital platforms for doing office work (work from home), ordering foods and other daily needs or transferring money and making payments. Moreover, online schooling, video conferencing and virtual networking have now become essential.
The countries that are more digitized have been able to minimize their losses during the pandemic. These are major lessons to the other countries. Even those who are less inclined toward digital technology and online platforms, either because they have to learn using smartphones or tablets or due to fear of data theft, are now enjoying the massive advantage of online platforms.
Stocks in Focus
The technology sector is indispensable and the reopening of the U.S. and global economies will only act as positive catalyst for this sector. Major technology stocks that are set to perform well in near future are Apple Inc. (AAPL - Free Report) , Microsoft Corp. (MSFT - Free Report) , NVIDIA Corp. (NVDA - Free Report) , Micron Technology Inc. (MU - Free Report) , Texas Instruments Inc. (TXN - Free Report) , Applied Materials Inc. (AMAT - Free Report) and Analog Devices Inc. (ADI - Free Report) .
The chart below shows the preice performance of seven above-mentioned stocks year to date.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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