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Tech stocks have been massively hurt this year due to the Fed policy tightening. Technology Select Sector SPDR Fund (XLK - Free Report) is off 18.5% this year against 12.7% crashes in the S&P 500. Rising rate worries have dampened the appeal for the stocks that rely on easy borrowing for superior growth. Technology falls in this category. In any case, tech stocks are guilty of overvaluation.
With the Fed on a policy tightening spree, investors are scratching their heads to find out if and when tech stocks would rebound. One of Goldman’s top tech fund managers, Brook Dane, said last month that the recent sell-off in the tech space (due to rising rates) has opened up a massive buying opportunity in some tech stocks, as quoted on CNBC.
Due to the sky-high inflation, the Fed has paced up policy tightening. The Fed enacted its first rate-hike (worth 25 bps) since the start of the pandemic in March and then a 50 bps rate hike in May for the first time in 22 years. Many more are likely to come this year. The U.S. central bank is expected to hike rate again by 50 bps next week.
Still, there are a few more reasons that may support the tech space despite rising rate fears.
Tech is New Normal
“New normal” trends like work-and-learn-from-home and online shopping, increasing digital payments and growing video streaming are sure to stay for long. The growing adoption of cloud computing, and the ongoing infusion of AI, machine learning and IoT are the other winning areas.
Big Tech Resistant to Inflation?
CNBC’s Cramer once explained that big tech names like Google-parent Alphabet GOOGL and Microsoft’s MSFT business model are not that responsive to the changes in inflation, including the rise in prices for raw materials, chemicals and commodities like gas, plastics, packaging and so on. Higher transportation charges are also less likely to bother the operation of big-tech companies. 5G could be a boom time for Apple as many will upgrade their phones while carriers expand their coverage of the new faster networks.
COVID-Lockdowns Easing in China
Zero-COVID policy took a toll on the global tech market as most tech companies have considerable Chinese reliance. However, China is easing lockdown restrictions after two months with Beijing and Shanghai reopening taking a speed. This will first improve the global manufacturing and shipping industries, thus helping to control inflation. Plus, supply chain scenario in the semiconductor and tech space will also be restored.
Stagflation to Flatten Yield Curve?
The current scenario is marked with high inflation and lower economic growth. The scenario is called stagflation. The more the central bank will hike rates to contain inflation, the slower will be the economic growth.
Since 1980, the 10-3 (the spread between the 10-year and 3-month Treasury yields) has historically averaged about 165 basis points. Currently, 10-3 spread is 169 basis points, in line with the average, as quoted on a InvestorPlace article, published on Nasdaq.
Historically, the 10-3 tends to compress when the Fed hikes rates. This would actually hold 10-year treasury yield from shooting higher. And the scenario is great for tech stocks.
Corrected Valuation
A massive selloff this year has corrected valuation of tech stocks. If the above-mentioned conditions hold good, the tech space would soar higher in the coming days as rich valuation is no more a deterrent.
Time for Chinese Tech ETFs?
China’s top political leaders planned to boost economic stimulus to promote growth. There could also be easing of the continued clampdown on tech firms. Against this backdrop, any expected change in the government’s clampdown policy should favor Chinese tech ETFs. Investors will try to cash in on the cheaper valuation of the Chinese tech ETFs (read: Time for Chinese Tech ETFs?).
ETFs in Focus
Below we highlight technology ETFs that have trended higher past month. These ETFs are in decent winning momentum.
Invesco S&P SmallCap Information Technology ETF (PSCT - Free Report) – Up 1.9%
Invesco S&P 500 Equal Weight Technology ETF – Up 1.7%
First Trust Nasdaq Semiconductor ETF (FTXL - Free Report) – Up 1.6%
Image: Bigstock
6 Reasons Why Tech ETFs May Rebound Soon
Tech stocks have been massively hurt this year due to the Fed policy tightening. Technology Select Sector SPDR Fund (XLK - Free Report) is off 18.5% this year against 12.7% crashes in the S&P 500. Rising rate worries have dampened the appeal for the stocks that rely on easy borrowing for superior growth. Technology falls in this category. In any case, tech stocks are guilty of overvaluation.
With the Fed on a policy tightening spree, investors are scratching their heads to find out if and when tech stocks would rebound. One of Goldman’s top tech fund managers, Brook Dane, said last month that the recent sell-off in the tech space (due to rising rates) has opened up a massive buying opportunity in some tech stocks, as quoted on CNBC.
Due to the sky-high inflation, the Fed has paced up policy tightening. The Fed enacted its first rate-hike (worth 25 bps) since the start of the pandemic in March and then a 50 bps rate hike in May for the first time in 22 years. Many more are likely to come this year. The U.S. central bank is expected to hike rate again by 50 bps next week.
Still, there are a few more reasons that may support the tech space despite rising rate fears.
Tech is New Normal
“New normal” trends like work-and-learn-from-home and online shopping, increasing digital payments and growing video streaming are sure to stay for long. The growing adoption of cloud computing, and the ongoing infusion of AI, machine learning and IoT are the other winning areas.
Big Tech Resistant to Inflation?
CNBC’s Cramer once explained that big tech names like Google-parent Alphabet GOOGL and Microsoft’s MSFT business model are not that responsive to the changes in inflation, including the rise in prices for raw materials, chemicals and commodities like gas, plastics, packaging and so on. Higher transportation charges are also less likely to bother the operation of big-tech companies. 5G could be a boom time for Apple as many will upgrade their phones while carriers expand their coverage of the new faster networks.
COVID-Lockdowns Easing in China
Zero-COVID policy took a toll on the global tech market as most tech companies have considerable Chinese reliance. However, China is easing lockdown restrictions after two months with Beijing and Shanghai reopening taking a speed. This will first improve the global manufacturing and shipping industries, thus helping to control inflation. Plus, supply chain scenario in the semiconductor and tech space will also be restored.
Stagflation to Flatten Yield Curve?
The current scenario is marked with high inflation and lower economic growth. The scenario is called stagflation. The more the central bank will hike rates to contain inflation, the slower will be the economic growth.
Since 1980, the 10-3 (the spread between the 10-year and 3-month Treasury yields) has historically averaged about 165 basis points. Currently, 10-3 spread is 169 basis points, in line with the average, as quoted on a InvestorPlace article, published on Nasdaq.
Historically, the 10-3 tends to compress when the Fed hikes rates. This would actually hold 10-year treasury yield from shooting higher. And the scenario is great for tech stocks.
Corrected Valuation
A massive selloff this year has corrected valuation of tech stocks. If the above-mentioned conditions hold good, the tech space would soar higher in the coming days as rich valuation is no more a deterrent.
Time for Chinese Tech ETFs?
China’s top political leaders planned to boost economic stimulus to promote growth. There could also be easing of the continued clampdown on tech firms. Against this backdrop, any expected change in the government’s clampdown policy should favor Chinese tech ETFs. Investors will try to cash in on the cheaper valuation of the Chinese tech ETFs (read: Time for Chinese Tech ETFs?).
ETFs in Focus
Below we highlight technology ETFs that have trended higher past month. These ETFs are in decent winning momentum.
Invesco S&P SmallCap Information Technology ETF (PSCT - Free Report) – Up 1.9%
Invesco S&P 500 Equal Weight Technology ETF – Up 1.7%
First Trust Nasdaq Semiconductor ETF (FTXL - Free Report) – Up 1.6%
ProShares S&P Technology Dividend Aristocrats ETF (TDV - Free Report) – Up 1.1%
iShares Cybersecurity & Tech ETF (IHAK - Free Report) – Up 0.4%