What’s more important than Kim Hyun-seok’s choice of Wall Street Now technology stock or value stock

March 24, 2000, 21 years ago, was the peak of the’com bubble’. After the bull market began in 1995, the S&P 500 has risen 160% to that day. Then, it started falling the next day and fell 49% by October 2002.

On the 24th (local time) on the New York Stock Market, the tech stocks-focused NASDAQ index plunged 2.01%. The Dow fell by 0.01% and the S&P 500 fell by 0.55%.

Contrary to the previous day, the 23rd, technology stocks showed a sharp weakness and economically sensitive stocks were good. Large tech stocks such as Apple (-2.0%) Netflix (-2.67%) and Nvidia (-3.27%) fell sharply. Cashwood’s Arc Innovation Listed Index Fund (ETF) fell 5.69%. In particular, meme stocks were disastrous, with GameStop plunging 33.79% and AMC 15.38%.

In fact, until the dawn of the day before the opening, Nasdaq Futures showed an uptrend, and the Dow and S&P 500 Futures remained at a premium.

However, as the’reflation trade’ strengthened after the market began, the Nasdaq fell sharply and the Dow index once rose to 300 points. It was a typical’reflation trade’.

However, after 2pm, sales were released indiscriminately in the second half of the market, and in the end, the Nasdaq fell more than 2% and the Dow index ended slightly but negatively.

In fact, the bond market, which has dominated the stock market for the past few weeks, has steadily stabilized on this day. The 10-year interest rate fell to 1.61% per year, down to the level before the surge due to 7-year bidding, which was low on the 25th of last month. The bid rate for the five-year bidding of $61 billion held that day was 2.36 times, similar to that of last month (2.38 times), and the issue rate was 0.850%, which was the same as the market interest rate.

Observations are divided about the sharp decline in technology stocks despite the stabilization of interest rates. First, there is an analysis that a lot of technology stocks are withdrawn due to rebalancing such as pension funds in the first quarter. It is an observation that during the rebalancing process, economically sensitive stocks are held and technology stocks are sold first. After 2pm, the last-minute sale has been opened and the index has been pulled down for the 6th trading day. On the other hand, if you see that the bond buying trend will increase and the interest rate will stabilize, it is possible that it is due to rebalancing.

Anyway, almost every day, there is a phenomenon of going back and forth between growth stocks and value stocks.

There are three main reasons for this.

① High valuation

Until last November, technology stocks surged. However, the direction of the deal changed after the announcement that the vaccine prevention rate was over 90% in November. Since then, value stocks, economically sensitive stocks, and small size stocks have advanced.

Now, economically sensitive stocks are also expensive. This is confirmed by numbers. Stock prices of many economic-sensitive stocks, such as Gap, L-Brands, and Live Nation, have already risen earlier than before the corona pandemic at the beginning of last year. SPDR Portfolio S&P 500 Value ETF (SPYV) investing in value stocks among S&P 500 stocks has a stock price-to-earnings ratio (PER) of 37.5 times (based on last year’s profits). The SPDR Portfolio S&P 500 Growth ETF (SPYG) fund investing in growth stocks is equivalent to 38.7 times.

This means that both technology stocks and value stocks have become very expensive. Morgan Stanley, who has recommended’reflation trade’ since the end of last year, recommended a’reduction of weight’ on small-cap stocks on the 15th because it was “too high.” As a result, value stocks and growth stocks fall one day and then rise one day.

Finance Minister Janet Yellen said in a testimony to the House Financial Services Commission the day before that “asset valuations are historically high.”

As a result, the major index cannot rise. The S&P 500 index closed at 3915.59 on February 8. The closing price for the day is 3,889.14. We have been stuck in the 3850~3950 box for the past month and a half.

② Interest rate rise

The second is interest rates. Technologists seemed to overcome valuation resistance with outstanding performance. The performance of technology companies in the fourth quarter of last year, announced in February, was very good. However, from this time on, the bond market had a headwind. The 10-year U.S. Treasury bond yield, which remained at 1.1% per year until February 10th, has since soared to 1.74% on the 19th of last week. Technology stocks are weak in interest rates. As interest rates rise, the investment attractiveness of tech stocks betting on future growth (profit) is relatively reduced.

The bond market has stabilized again this week. The rise in interest rates slows. So, technology stocks rose a lot yesterday.

However, it is rare to see that interest rates will continue to stabilize throughout the year. With the upcoming economic recovery, interest rates will steadily rise. The preliminary value of the U.S. Manufacturing Purchasing Managers Index (PMI) for March announced by market research firm IHS Markit that day was 59.0, higher than the previous month’s final value of 58.6. In addition, the service PMI preliminary value rose to 60.0 from 59.8 last month.

“It will be a very, very strong year,” Powell said in his testimony on the day. “There are still downside and upside risks, but from a growth point of view it will be a really strong year.” “I am not concerned that the rise in interest rates is in response to vaccine news and growth expectations.” If interest rates rise like this and at some point exceed 2% per annum, technology stocks may lose much of their attractiveness as funds are directed towards bonds.

③ Corona re-spread → Delayed economic recovery?

In Europe, such as Germany, France, and other parts of the world, the re-proliferation of the corona has started a blockade again or plans to normalize the economy have been postponed. The World Health Organization (WHO) announced the previous day that the number of new cases of infection was increasing in most parts of the world as the highly contagious variant of the virus continued to spread. It is also raising concern that the National Institute of Allergy and Infectious Diseases (NIAID) raised concerns that the clinical trial results of AstraZeneca’s (AZ) corona vaccine may contain out-of-date information.

This poured water with anticipation that the economy would recover rapidly as economic activity resumed with spring. Economically sensitive stocks are also bound to slow down.

What should investors do in this situation? Should we stop investing and watch?

On this day, Bank of America (BofA) published an interesting report. From 1930 onwards, if an investor missed the 10th day, the best day based on the S&P 500, every 10 years, the total return was only 28%. On the other hand, it was estimated that the rate of return would have been 17,715% if continued investment.

Of course, the investor is so smart that if he was only holding cash to avoid the worst ten days of the decade, the return would reach 3.79,3787%. Also, excluding both the worst and the best days, it was found to make a profit of 27,213%. But given that it’s impossible to pinpoint peaks and lows, BofA concludes that the smartest way is simply to keep investing.

If it’s wise to keep investing, what stocks to buy in the current situation?

Fundstrat’s founder Tom Lee continues to insist on buying economically sensitive stocks as the US economy recovers from the coronavirus pandemic.

In an interview with CNBC, he compared the current investment environment after the year-long coronavirus pandemic to the same as after the massive war in the past. “After the war, companies sensitive to the economic cycle become the new growth stocks. After the war, the Iraq War, the Korean War, and the Second World War, all that has happened. Now it is the same as the post-war environment,” Lee argued.

He is a Korean-born senior strategist at JP Morgan and is one of the first strategists to hit the bull market last year. He said, “I think that having the’epic center’, which has been hit hardest by the coronavirus, is a way to take advantage of the downturn of the future economic upturn. “A lot of them have great businesses. They have a lot of operating leverage and they have the ability to see incredible performance gains.”

Lee also pointed out that investors, who have enjoyed long-term performance in growth stocks such as technology stocks, may need to change their mindset. The reason that growth stocks have risen a lot over the past 20 years is that interest rates have continued to fall. But in the future, interest rates are more likely to rise rather than fall. He emphasized that “the business cycle stocks will become the new growth stocks due to the increase in profits caused by the reflation environment.”

Along with inflation, he predicted that mergers and acquisitions (M&As), which will be in full swing this year, will support the share price rise.

On the other hand, Brook Dane’s portfolio manager at Goldman Sachs (PM) is different. In the video posted on the Goldman Sachs website, he insists on finding opportunities in technology stocks with tremendous opportunities as it is the era of technology.

He argued that there was a big opportunity for mid-cap US tech stocks underneath mega tech companies. There’s a lot of innovation happening, but people don’t know much yet.

Dane PM stated that there are two fundamental drivers that have made the growth of these medium-sized tech companies possible.

The first is the rise of the public cloud. As Amazon, Microsoft, and Google advance the cloud, anyone has an innovative and fast computing power that can be expanded anytime, depending on their needs. “Cloud infrastructure is very important to the growth of software companies and the digital economy,” he explained.

The second is the advent of mobile phones. “People around the world have more mobile phones than toothbrushes,” he said. “The intelligence generated at the edge of these networks and the computing power that makes it possible provides a stage for a wide range of innovation.”

These two big foundations are creating innovations in software, digital payments, and e-commerce.

“Some technology areas are overvalued and there aren’t many attractive opportunities,” said Dane PM. He advised to look for an opportunity if the valuation was lowered by higher interest rates. “The next decade will see more innovations and more disruptive changes than we have seen in the last 30 years,” he predicted, foreshadowing major changes in fields such as artificial intelligence and machine learning, new semiconductors, digital payments, and software. .

Dane PM just pointed out that “investing in technology comes with a lot of risk.” Innovation comes with change and chaos, which can often cost companies. So he explained that you should always be on the winner’s side by looking at what changes are happening in the technology ecosystem and who is winning and losing. It also said that we need to keep an eye on the impact of tensions between the United States and China on technology and the possibility of regulating the growing market dominance of technology companies.

It will still be difficult to determine where to invest in growth stocks and economically sensitive stocks.

“In general, factors including positioning and momentum perform better in the short term, but fundamental analysis wins in the long run over the years,” said Sabita Subramenian, head of US stocks at Bank of America.

Reporter Kim Hyun-seok [email protected]