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Outside the Box: This selloff in tech is irrational — even more so than last year’s climb

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The past 14 months have generated some of the wildest market swings that many investors can remember. As the U.S. all but shut down in March 2020 over COVID-19, the Dow Jones Industrial Average
DJIA,
-1.81%

plunged 6,400 points, or roughly 26%, in barely four trading days.

Perhaps more shocking was the meteoric rise that followed. The entire tech industry swelled as the FAANG names along with Microsof t
MSFT,
-3.00%
,
Tesla
TSLA,
-3.97%
,
Zoom
ZM,
-3.47%

and others shot far higher than pre-pandemic levels well before investors were anything but certain about the long-term certainty of the economy. Despite limited company guidance, it quickly became evident that tech had a far more robust immune response to COVID-19 than the economy.

Fast forward to May of 2021. The retracements in tech have felt almost as dramatic, with indexes like the PHLX Semiconductor Index
SOX,
-4.21%

 showing semiconductors entering correction territory. In addition, many tech names that rose rapidly throughout the pandemic have fallen well below their highs in the fall of 2020, including Zoom (roughly 40%), Twilio
TWLO,
-3.24%

(roughly 40%), Tesla (roughly 30%), AMD
AMD,
-3.01%

(roughly 20%) and Netflix
NFLX,
-2.21%

(about 10%).

The oddest thing, though, isn’t the fall. It is the meteoric rise that took place in the middle of the pandemic. When the economy was being propped up by stimulus and recessionary monetary policy, it was no secret that the U.S. government was printing extraordinary amounts of money, or that inflation would be a risk, or that our debt was going to soon exceed our national GDP. These indicators were clear as day–all you had to do was look. 

Now it seems we are finally in the late innings of the pandemic. More than half of Americans have received at least one dose of a COVID vaccine. We see hospitality, travel, retail, schools and offices starting to reopen. Unemployment is quickly dropping and has returned to a more manageable 6.1%, and we have arguably more demand for labor than we can fill.

Tech, too, is arguably doing better than ever, with big names reporting their best results in years. Apple’s
AAPL,
-2.76%

most recent quarter may be its best in its history. Microsoft had its largest year-over-year revenue growth in percentage terms since 2018. Qualcomm
QCOM,
-3.39%
,
AMD, Amazon
AMZN,
-2.37%

and Alphabet (Google’s parent)
GOOG,
-2.66%

GOOGL,
-2.77%

all blew out expectations, while NVIDIA raised its guidance just ahead of earnings.

Furthermore, there is little indication based upon what company executives are saying that the demand for tech will slow anytime soon. With growth for semiconductors, PCs, Cloud, AI, 5G, and electric vehicles all robust, it’s hard to suggest a selloff is a sign that investors are being forward-looking. Yet tech now finds itself under pressure in favor of names in retail, energy, real estate and other sectors as well as in cryptocurrencies. Cathie Wood’s high-profile ARK Innovation Fund
ARKK,
-3.86%

 has seen its value fall around 35% from its February high (although the fund is still well higher over 12 months). She recently said she now expects a return of 25% to 30% as a result of the recent fall in prices.

Over the next 12 to 24 months, tech is almost certain to outperform value. The pullback wasn’t logical based upon current or future performance.

This presents an opportunity for investors to consider that names like Microsoft, NVIDIA
NVDA,
-3.93%

and Apple, which have outperformed throughout the pandemic and show little indication of tapering, and should yield outsized returns versus value and rotation plays.

Also, stay-at-home tech names like Zoom have significant upside based upon recent retracements. Zoom’s business growth may level-off slightly from triple-digit-percent year-over-year growth, but the remote-work trend that caught fire during COVID isn’t going away.

It’s easy to get caught up in the emotional fall of tech and the headlines that ensue, but tech hasn’t fallen. Tech will continue to perform. As a society, we are committed to it. It influences our work and our personal lives. This attachment to tech will drive even more need for chips, devices, cloud, AI, and connectivity, and this is why it isn’t hard to make this call, even in a dark moment for tech. 

As the market rose, some pundits liked to call it a rational exuberance– excitement about where the market is heading and a willingness to look past the cataclysmic events of March 2020.

Now, as it falls, it is nothing but an irrational retracement of such exuberance that arguably sent stocks far higher than they ever should have gone amid the pandemic.  That required a pullback and consolidation to pave the way for another run for tech names.

Also read: All eyes are on semiconductor companies amid chip shortage — investors should be looking at these four lesser-known names

Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising, and/or consulting to Nvidia, Qualcomm, Microsoft, Amazon and dozens of other companies in the tech and digital industries. Neither he nor his firm holds any equity positions with any companies cited. Follow him on Twitter @danielnewmanUV.

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