After more than a decade of fantastic performance, the party may be over for the tech sector – for now.
Last week, I mentioned that of the three major indexes, the Nasdaq has been suffering the biggest losses in the market’s recent dips.
While it’s been an up and down ride over the last month, the down days for the Nasdaq have been far worse for the Nasdaq than the S&P 500 or the Dow.
And as we discussed, the reason for that is the tech-heavy makeup of the Nasdaq. Recently, investors have been rotating out of the tech sector after a year of incredible performance.
I would typically see outsized drops in a particular sector or industry like this as a buying opportunity, but there are three reasons why I will be mostly avoiding tech stocks for a while.
Where’s the money?
There seems to be a perfect storm brewing for the tech sector that’s poised to bring even more pain on the sector in the near future.
For starters, concerns over rising inflation are hurting the market in general, but in particular tech stocks.
Tech stocks are viewed as a more risk-on, high growth investment. When interest rates rise, investors are attracted to bonds and related securities for the higher yields. And while some sectors like consumer staples do well as defensive positions in these market conditions, tech stocks are among the first investors rotate out of in a rising interest rate environment.
The other two reasons that tech stocks could fall even further are two potential changes in legislation.
While the proposal to increase the corporate tax rate back up to 28% would hurt the bottom line of corporations across the board, the world’s biggest tech stocks could be the most impacted. It’s been estimated that some of the largest cap tech companies like Apple Inc. (AAPL), Facebook, Inc. (FB), and Alphabet Inc. (GOOG) could see their earnings in 2022 reduced by as much as 9% if the new tax bill is passed.
On top of that, there’s the potential for the capital gains tax increase to 43% for wealthy Americans. While the hike would only apply to those earning more than $1 million, it still has the potential to sink the tech sector even further.
If passed, it could lead investors to move a substantial amount of money out of the tech sector – which has performed incredibly well over the market’s long bull run – as they look to avoid a higher tax rate on their profits.
And looking at a technical analysis of the market doesn’t paint any rosier a picture…
How do I get some?
I’ve been warning readers about the potential for a market correction for weeks now, and it appears we may finally be on the cusp.
Volatility has gone through the roof, with the VIX popping to over $26 yesterday.
We also see three black crows in the S&P 500 Futures, indicating that the stock market could go lower and fall to the 3950 support level.
And the Nasdaq has been bouncing off of the 100-day moving average – which has been a key support level. If it falls below it, we could see even greater selling pressure.
I like tech stocks in the long run, but here I would not be looking to buy them.
Here’s what I’m focused on instead.
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In the Spotlight: The downside to economic recovery…
As we recovery from the worst health emergency in more than 100 years, there’s a lot of positives to come from the economic rebound we’re experiencing.
But rising inflation is not only hurting investment portfolios, but our wallets, too.
While many Americans are returning to work and are once again able to gather with friends and loved ones, the overall benefit to the economy will outweigh the negatives.
But rising inflation won’t just have an effect on those with big money in the market.
Products we use every day will become more and more expensive as the bill for keeping interest rates low and printing money during the pandemic comes due.
Prices have already begun to rise on everyday goods like gas, grains, meat, personal care products…
The list goes on and on.
While rising prices are something no consumer likes to see, there are opportunities for profit. I’ve got my eye on a bevvy of companies that could stand to benefit from rising prices – and when the time is right, I’ll let you know when to jump in. Stay tuned.