The technology sector, which enabled Wall Street to get rid of the coronavirus-induced short bear market and formed the new bull market, suffered a bloody blow as soon as 2022 started. Record-high inflation compelled the Fed to turn ultra-hawkish with tighter liquidity control and a higher interest rate regime. Consequently, the blood bath in the technology sector has continued year to date.
However, in the first five months of this year, the valuation of this sector has been corrected significantly. The Technology Select Sector SPDR (XLK) — one of the 11 broad sectors of the S&P 500 Index — has tumbled 23.4% year to date. The tech-heavy Nasdaq Composite Index has plunged 27.9% year to date and is currently in bear market.
Although the Fed is yet to deliver any signal of shifting from its ultra-hawkish monetary policies, a section of Fed officials has recently spoken in a relatively dovish tone. The minutes of the Fed’s November FOMC meeting revealed that a “substantial majority” of Fed officials favor reducing the magnitude of the interest rate hike going forward.
The consumer price index and the producer price index for October came in lower-than-expected. These two data along with the personal consumption expenditure (PCE) price index — Fed’s favorite inflation gauge — for the third quarter, have indicated that peak inflation may be behind us.
Consequently, the Fed is likely to relax its tighter monetary control. The central bank is expected to reduce the magnitude of the interest rate hike from the December FOMC meeting. This will help the overall equity market.
The FOMC minute stated "A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee's goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate."
Technology is the Best Bet for the Long Term
The recent meltdown 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 hi-tech 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, has given a boost to the overall space.
Tech Has Vast Potential — Buy on the Dip
The leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared to 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 serve most of their needs. Even those 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 their office work (work from home), ordering food 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 for 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 feeling the massive advantage of online platforms.
On Aug 9, President Joe Biden signed the CHIPS Act of 2022 into a law. This legislation will provide $52 billion to help computer chip manufacturers and ease the shortage of components vital for a range of industries.
The Biden administration has expressed concerns that the United States had a 37% share of global semiconductor and microelectronic production in 1990, which has drastically dropped to just 12%. Consequently, U.S. businesses, especially the auto and high-tech industries are suffering from an acute shortage of chipsets owing to the breakdown of the global supply chain during the pandemic.
This stimulus will benefit chip manufacturers like
Analog Devices Inc. ( ADI Quick Quote ADI - Free Report) , Texas Instruments Inc. ( TXN Quick Quote TXN - Free Report) , GLOBALFOUNDRIES Inc. ( GFS Quick Quote GFS - Free Report) , Lattice Semiconductor Corp. ( LSCC Quick Quote LSCC - Free Report) and ON Semiconductor Corp. ( ON Quick Quote ON - Free Report) .
These stocks have provided double-digit returns in the past month. GLOBALFOUNDRIES and Lattice Semiconductor carry a Zacks Rank #2 (Buy). You can see
. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Image Source: Zacks Investment Research