by Bryan Perry

March 23, 2021

The current correction in the Nasdaq is sizing up to be a textbook consolidation, in that it is following a torrid 2020 rally for the tech-heavy Invesco QQQ Trust (QQQ) that traded at a lofty premium to its long-term moving averages. The “Reopening euphoria,” combined with rotation into financials, industrials, materials, energy, transportation and leisure stocks sucked short-term air out of the tech sector in a classic mean reversion scenario. The bond market has also been a source of funds for the value/cyclical trade.

The consolidation within Nasdaq is in its sixth week as quarter-end window-dressing will likely keep the value and cyclical sectors elevated as fund managers intend to show broad exposure to these stocks. This month-end dolling up of portfolios comes in light of the fact that most value and cyclical stocks are technically very overbought and due for a sharp pullback, like what is now underway in the energy patch.

But leave no doubt, professional fund managers with 5-star track records are not wild about owning cruise line, airline, restaurant, hotel and casino stocks – many of which are now trading at higher prices than before the pandemic hit. They are also more likely to rent and not own stocks of commodity-producing companies with rising raw materials input costs and those with burgeoning pools of physical labor. In the big picture, they want to own firms engaged in trends that include 5G, IoT, mobile ecommerce, cloud applications, fintech, EV, AI, cyber security, augmented reality, virtual reality, streaming entertainment, remote medical care, robotic manufacturing, clean energy, smart grid, smart cities and smart homes.

Spending Priorities by Information Technology Initiative Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Dozens of other high-tech applications fall under the broad heading of Software as a Service (SaaS) that address everything from remote workforce, HR, marketing and sales, just to name the obvious.

American ingenuity excels in literally every industry and business segment, but it’s the mega-trends in technology with double-digit, long-term compounded annual growth rates (CAGR) that are of the most interest. Value, cyclical and epicenter companies have streaky sales and earnings growth, and it can be reasonably argued that most of future sales and earnings growth has been priced into reopening stocks.

At the same time, as the tech-rich Nasdaq is doing some further backing-and-filling, the fundamentals for most of the technology sectors noted are rapidly improving, as evidenced by some channel checks on corporate spending and mid-quarter updates by some leading companies.

When looking at the 3-year chart of the QQQ, the blue 20-week moving average shows the bull trend is still intact. Shorter-term charts show high levels of implied volatility, reflecting the multiple contraction of high-beta stocks of companies with soaring sales growth but no earnings or P/E ratios yet to speak of.

Nasdaq QQQ Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

From Kiplinger’s latest business forecast, released on March 4, we read this:

“The pace of capital spending is now 8.7% above its pre-pandemic level, and new orders are 9.7% higher. Purchases of machinery are robust, as are computer sales. Even though many uncertainties about the economy’s progress remain, businesses are apparently deciding to push ahead with expansion plans that had been on hold in order to be prepared for the eventual recovery. However, surveys indicate that large firms are more enthusiastic than small firms at this time.”

Some of the likely beneficiaries of bigger spending include makers of industrial robots and 3D printers. Robots eliminate the risks of physical distancing among employees, work 24/7 and don’t require costly benefits packages. And 37% of U.S. assembly plants plan to invest in 3D printers, a record high.

Shares of 3D printing maker stocks trade on average 50% off their February highs. Sales of digital media and marketing software is seen picking up speed after sector leader Adobe Inc. (ADBE) reported last week that it expects revenues to accelerate 23% to $2.78 billion, following three straight quarters of 14% top-line growth. Shares of ADBE topped out at $536 in September 2020 and trade today around $440.

Navellier & Associates does own Adobe (ADBE) in managed accounts. Bryan Perry does not own Adobe (ADBE) personally.

Worldwide Information Technology Spending Forecast Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

All IT spending segments are forecast to return to growth in 2021. Enterprise software is expected to have the strongest rebound (8.8%) as remote work environments expand and improve. The devices segment will see the second highest growth in 2021 (8%) and is projected to reach $705.4 billion in IT spending.

A good portion of the increased spending in IT is to buttress the expanding global remote work force, to deliver robust performance that can compete with corporate campus infrastructure. Gartner forecasts almost 50% growth in the work-from-anywhere labor force. This is shaping up to be a permanent shift in corporate culture as there is the ongoing risk of future viruses that are now again showing up in Europe.

Percentage of Employees Working Remotely Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The acceleration in software and semiconductor spending will show up strongly in first quarter results, and forward guidance should prove to be the catalyst that puts Nasdaq back on track to trade back to new highs and regain its market leadership by the third quarter, assuming the yield on the 20-year T-Note doesn’t rise above 2%, as this is a psychological marker for the algo-driven high-frequency trading mob.

It’s been a tough – and for some stocks, brutal – past six weeks in the tech sector. But after every storm, there’s a rainbow. And once the market embraces that, the greatest amount of future business spending within the S&P 500 is going to be IT – by a wide margin – so buying the best blue-chip tech stocks on this second Nasdaq pullback might prove to be a very savvy strategy heading into April.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Inflation Fears Continue to Mount

Income Mail by Bryan Perry
Corporate Investment in Tech is Set to Surge In 2021

Growth Mail by Gary Alexander
Which is Scarier – A Market Meltdown, or a Melt-Up?

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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