I suppose the answer really depends on your level of expectation and your time frame. If you're looking for technology to outperform the benchmark S&P 500 over the next few months the way it did throughout much of 2020, then you'll likely be quite disappointed. I believe the combination of a health crisis misunderstood as a financial crisis AND the massive bubble in treasuries drove technology prices into the stratosphere during 2020. Many component stocks simply ran too far too fast. 2021 has been "catch-up" for the rest of the market as rotation has ripped technology stocks.
There's nothing wrong with technology stocks. The earnings reported last quarter were absolutely spectacular, but it was a great big case of "buy on rumor, sell on news." The stock market has a long history of overdoing things. Stocks are overbought and then they become oversold. Then it's rinse and repeat. Those cycles can be amazing or devastating, depending on which side you're on. The good news is that earnings are going to soar in many technology companies as we move into the second half of 2021 and into 2022. Valuations will pick back up again, but there may be further short-term pain first.
Let's take a look at the relative surge that we've seen in technology over the past decade, especially during 2020, to gain some perspective:
Technology was outperforming the S&P 500 in a steady relative uptrend just prior to the pandemic in 2020, which enabled the NASDAQ 100 ($NDX) to outperform. Technology's representation in the S&P 500 and NASDAQ 100 is 23% and 42%, respectively. Technology has a much bigger impact on the NDX, which is the primary reason we've seen underperformance in the NDX (and QQQ, the ETF that tracks the NDX) in 2021.
When the pandemic began forcefully in March 2020, treasury yields plummeted as demand for treasuries exploded and that historic yield drop created astounding valuations in the high-growth technology area. Of course, hindsight is 20/20 and everything is crystal clear now. But we need to constantly learn from history.
In the very near-term (next few months), we are going to see additional inflationary reports that will unnerve even the biggest technology bulls, myself included. While I do not believe inflation will be a concern longer-term, the media is going to hype and run with this story over the summer, so you might as well be prepared. The May CPI and PPI reports will be released June 10th and June 15th, respectively. Mark those two dates down on your calendar right now. A part of me really wants to see continuing relative weakness in technology shares the next few months to perhaps drive that XLK:$SPX relative ratio all the way down into the relative channel reflected on the above chart. That could set up for another string of solid quarters ahead. No, I don't believe the technology run has ended. Far from it. But I do believe the current relative weakness needs to be respected.
I recently provided a one-year relative chart that I believe shows, in rather clear fashion, the relative cycle of technology performance since the pandemic began - and one of the industry groups helping to inflict pain on the sector:
While the recent relative bounce in both the XLK and the DJUSSW has been nice, it's honestly not all that convincing at this point. As those inflationary reports draw near, don't be at all surprised if the TNX rises again and technology takes another relative leg lower. There could very well be more relative pain ahead for a group that couldn't have enjoyed 2020 more.
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