On Dec. 10, I forecasted a good year for tech investing.
After the tepid first quarter – a 0.7% contraction in U.S. gross domestic product (GDP) – you might think I’d adjust my prediction.
On the contrary, over the following months, I’ve shown you how the technology sector has led the market higher and driven the overall U.S. economy.
So far this year, the tech-heavy Nasdaq Composite Index is up 7%, more than four times better than the Standard & Poor’s 500 Index’s 1.64% gain.
Plus, as we move further into the year, it looks like that grim first quarter was a blip – not the start of trend.
With that in mind, let’s take a closer look at what caused that “blip.”
And then I’ll show you some numbers that prove we’re already bouncing back – and that will boost your tech portfolio for the rest of this year…
Poor Weather, Labor Disputes and a Strong Dollar – Oh My!
A couple of relatively negative reports International Monetary Fund turns up what caused the first-quarter doldrums.
In a June 4 report from the International Money Fund, the agency calls on the U.S. Federal Reserve not to raise interest rates until 2016. The reason: IMF officials say the U.S. economy has lost some momentum lately due to the strong dollar and a labor dispute at West Coast ports that slowed down shipping.
In April, the IMF forecast U.S. economic growth this year at 3.1%, but its June 4 report cuts that figure to 2.5%.
Then there’s the recent report from the Association for Manufacturing Technology. The trade group says total U.S. tech orders in the first quarter declined 18.7% from the year ago period to $399.8 million.
However, a closer look at that report indicates that the U.S. economy during first two months suffered because of terrible weather throughout the nation.
The report doesn’t come out and say just that, here’s how I figured it out: After two anemic months, March orders soared some 30% from February.
And that’s the bad news…
Strong Auto Sales
In May, automakers reported sales that were nothing short of a blowout. According to market researcher Autodata Corp., the industry had an annualized sales pace of a stunning 17.8 million vehicles.
That compares with average sales rate over the past decade of 15.2 million and, if it holds out, would be the highest sales volume since 2001.
It may seem odd that I, a tech analyst, pay so much attention to auto sales. Of course, the auto industry has for decades played a critical role in the U.S. economy
But there’s more to it than that. Vehicles have become rolling showcases of sophisticated technology. The “connected car” features everything Bluetooth integration and Wi-Fi access to rear view cameras and in-dash infotainment centers.
Meanwhile, to boost sales and make vehicles safer, carmakers are adding advanced driver assistance systems (ADAS) – that is, self-driving features. I’m talking such items as adaptive cruise control, lane departure warning systems, and front and rear cameras integrated with collision avoidance radar – all of which need software, sensors and semiconductors.
Then there’s the sales numbers at Tesla Motors Inc. (Nasdaq: TSLA). The company, which makes and markets the best electric vehicles on Earth, has begun unveiling self-driving technology.
May sales for Silicon Valley’s only car company are off the charts. For the upscale Model S, sales climbed some 50% from the year-ago period to 1,652 vehicles.
The Brains of the Tech Economy
There’s plenty more driving the economy than auto sales. And there’s one thing in particular I look at when taking the temperature of the entire tech economy – semiconductors.
According to the Semiconductor Industry Association, global chip sales hit $83.1 billion in the first quarter. That’s up 6% from the year-ago quarter – itself a boom period.
Semiconductor sales are a barometer for the entire global tech ecosystem for a simple reason. They’re integral to most of the tech products that consumers and businesses simply cannot do without – smartphones, factory robots, streaming media players, printers/scanners/copiers, personal computers, Wi-Fi Internet access and those connected cars I just talked about.
Meanwhile, market bears keep warning us that the rising value of the dollar will dent our ability to export all those high-tech products and could cause the economy to weaken.
However, we saw just the opposite happen in April.
According to the U.S. Commerce Department, the trade gap narrowed by 19.2% to a seasonally adjusted $40.9 billion. That ranks as the biggest dropin more than six years.
Given that U.S. GDP declined by 0.7% in the first quarter, this is welcome news, indeed. And there’s more where that came from.
The rising value of the dollar has had only a small effect on the nation’s manufacturing sector. According to a National Association of Manufacturers poll in April, 88.5% of respondents are optimistic about expansion for the rest of this year.
That sentiment is off about 3% from the previous quarter’s rating of 91.5, but it’s the second-highest rating since the beginning of 2013. In other words, six years into the recovery, manufacturers still see bright days ahead.
That tracks with a report showing that consumers, who account for 70% of U.S. spending, remain upbeat. As measured by the Thomson Reuters/University of Michigan, the consumer sentiment rating for April was 95.9 – the second-highest reading since 2007.
Housing also is on a roll. New permits in April jumped 10%, the Commerce Department said. That month housing starts surged 20% to an annualized rate of 1.14 million units, the highest level in 7.5 years.
The economy continues to improve on the jobs front as well. In April, unemployment fell to 5.4%, a near seven-year low, as the economy added 223,000 jobs.
May saw further improvements. For the last week of the month, first-time jobless claims declined 8,000 to a seasonally adjusted 276,000, slightly beating forecasts. It’s a good sign that layoffs continue to decline.
I know these weekly jobless claims can fluctuate wildly. If my honors economics degree taught me anything, it’s that numbers can spike and plummet from month to month and quarter to quarter.
However, since I picked that degree up, I’ve spent a long time in the “real world” studying the market and the economy. And that experience tells me to look at the overall the trend line – and that’s strong.
Moreover, applications for unemployment aid have been under 300,000, a historically low level, for 13 straight weeks. That’s slightly more than an entire quarter.
Overall, this is a strong economic report card.
So I see many reasons to remain upbeat about investing in tech stocks for at least the rest of 2015.
And you can rest assured that I will be continue to use our twice-weekly conversations to provide you lots of ideas about how you can make money from the greatest wealth machine every invented — high tech.
[Editor’s Note: What do you think about the state of the economy? That stock market? Michael loves hearing from his readers. Let him know what you think of his “state of the economy” report by posting a comment below.]
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