Investors are Rotating to These Recovery Sectors as Tech Volatility Continues

By: Andrew McShane

It’s been a bumpy year for tech stocks and tech volatility is set to continue for the short-term. After hitting its all time high in February, the Nasdaq sharply corrected 12% and then recovered over the course of the following 8 weeks. Now, Tech is in a bit of a mini-correction again dropping 5.5% over the past 2 weeks. It’s not a controversial stance to say that Tech’s volatility is likely to continue into the 2nd half of this year. Many investors are taking note and have been rotating out of tech and into sectors that are supporting the reopening of the economy and the recovery from the pandemic.

It’s so Hard to Say Goodbye

Well, it’s not so much, “goodbye” as it is, “see you later.” Tech has made investors a TON of money over the past 5 years. Even before its meteoric rise after last year’s COVID correction, the famed Big Tech stocks’ appreciated $5 Trillion over  5 years. It can be tough to make a rotation out of a sector that has benefited investors for so long, but it looks like that time has come.

It’s not just that Tech is over-owned, there are other major threats that are going to contribute to further tech volatility this year.

Tech’s Big Threats

  • Way-Too-High Valuations: As I mentioned, the Big Tech Stocks, Facebook, Apple, Amazon, Microsoft and Google saw a $5 trillion increase in appreciation in the past 5 years. Investors poured their money into these stocks and rode momentum as far as it could go. That isn’t to say that these stocks are not valuable. They obviously represent the future of the tech market. However, when Big Tech’s stock prices grow 100% – 200% in as little as 8 months, there becomes a chasm between price and value.
  • Regulation and Lawsuits: The Biden administration has not made it a secret that it favors tighter regulation around tech privacy practices. We have already seen companies like Apple take pre-emptive measures to ensure greater transparency around how its apps tracks its users. And  companies like Google and Facebook face wide-ranging anti-trust and anti-monopoly lawsuits for their aggressive competitive practices.
  • Capital Gains Tax: We just mentioned how much profit tech has made investors. Proposals set to raise long term Capital Gains Tax from 20% to 39.6% om households making $1,00,000 or more, could prompt investors to sell tech shares to avoid the new tax.

So, while tech volatility will continue for the short-term, it doesn’t mean that tech is finished. In fact, the recent sell-of could produce a significant buying opportunity in tech stocks that have solid valuations and long-term viability. Clean energy and other innovator stocks could be bought at bargains right now. These types of stocks could quickly eclipse hot 2021 sectors like energy in the coming years.

The Rotation into Recovery Sectors During Tech Volatility

Investors have been rotating out of tech and growth stocks and into value and recovery stocks since mid Q1. With the re-opening on a fast track thanks to COVID cases plummeting, recovery stocks seem to be the safe and profitable place to ride out any other volatility.

ALL the way back on Jan. 1, we recommended that investors pay attention to the Real Estate sector. More specifically, we said to pay attention to the hospitality and travel sector of CRE.  The COVID lock-downs decimated hospitality stocks last year. Now, with a travel demand at feverish levels, this sector is still poised for massive growth.

We recommended our readers to look at MGM Growth Properties (MGP) and APPLE HOSPITALITY REITS (APLE). Both stocks have done well this year but have not had the benefit of realizing the impact of a re-opened economy and summer vacations.

APPLE HOSPITALITY REIT still looks very attractive. They are the largest owners of upscale hotels in the country, with properties such as HYATT, Hilton, and Marriott. Beyond the desire to get the hell out of the house, vacationers are going to put a premium on cleanliness when it comes to where they stay. Names like HYATT and Hilton are synonymous with cleanliness and customer service.

Other sectors like industrials will remain stable and growing this year. Stocks like Caterpillar (CAT) and Deere (DE) would benefit tremendously from the infrastructure bill.

In Summary: 

  • Tech was due for a breather. And it will remain choppy as it regains its footing.
  • Tech stocks with solid valuation and future viability could present buying opportunities
  • Rotation into recovery sectors will help ride out volatility
  • I still don’t think the market has priced in the appropriate amount of travel demand and hospitality stocks could benefit greatly

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