“This time will be different” is often viewed as a dangerous phrase in financial markets, but there are occasions when things really do turn out differently compared to the last go-around.
With the Federal Reserve widely expected to raise interest rates next year, spurred in part by lingering inflation, it could be worth considering that this time could be different for technology stocks in a rising rates environment. And if different comes to pass, it could benefit exchange traded funds like the Goldman Sachs Future Tech Leaders Equity ETF (GTEK).
Historically, technology stocks don’t perform well when inflation is running hot, though the sector is proving sturdy this year despite consistently higher readings on the Consumer Price Index (CPI). The S&P 500 Technology Index is higher by 22.47%.
Of the 11 GICS sectors (excluding communication services because it’s fairly new), consumer staples, energy, healthcare, real estate, and utilities usually perform well in inflationary environments while consumer discretionary, financial services, industrials, and materials often lag. That leaves tech, and some experts believe that, yes, this time could be different.
“This sector historically performed poorly when inflation was high, owing to its previous cyclical nature. In the past, consumer and business spending would decline when higher inflation and/or Fed rate hikes slowed economic growth,” says Charles Schwab’s David Kastner. “However, the sector has become less cyclical in recent years, likely due to the evolving nature of demand for Information Technology equipment and devices.”
Tech’s potential sturdiness in an environment of lingering inflation is highly relevant to GTEK because the fund devotes 73.4% of its weight to that sector, according to issuer data. The ETF’s second-largest sector exposure is communication services at 14.1%. That sector is just over three years old and hasn’t been truly tested by a lengthy bout of inflation prior to this year. It’s up 18.24% year-to-date as measured by the S&P 500 Communication Services Index.
Getting back to tech and GTEK, inflation is proving more persistent than expected, but that could actually work in the sector’s favor going forward.
“As seen during the COVID-19 crisis, demand for technology increased amid the decline in economic growth,” concludes Kastner. “While that was a unique event, consumer electronics have become integral to social interaction and entertainment. Meanwhile, businesses must invest in technology to remain competitive, as well as increase productivity to counteract labor shortages and higher wages. While the sector has extremely high valuations, its historical underperformance might not repeat itself if inflation does turn out to be persistent.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.