We can say the same for most tech stocks that have rallied during the pandemic. Tech stocks were hot, but are now overheated, overvalued, and overdue for a strong correction. Don’t panic just yet. Yes, there will be a correction. After all, the tech-laden Nasdaq index has gained more than 60% since March. But the correction will most likely be seen as a buying opportunity. Let’s face it. Social distancing is unlikely to disappear anytime soon and work from home seems to be a more permanent trend. These trends will continue to support tech stocks till at least 2022 and investors with long-term horizons will want these to be part of their portfolio.
Perhaps it’s time to update the monopoly board as tech stocks seem to have replaced utilities and banks as the new defensive asset class. That’s because the pandemic has got us thinking of technology as indispensable. In the pre-covid-19 era, this status was enjoyed by the utility or banking sectors, which is why these stocks found their way into defensive investor portfolios.
The bigger utilities had the advantage of highly predictable cash flows and generous dividends. In fact, these stocks were considered resilient to economic slowdowns. Even as consumer spending on other goods declined during a recession, they would continue spending on utilities. The pandemic squashed that logic!
Years of paying high dividends (65% on average) didn’t bode well for utilities, sending them scrambling for cash amid the coronavirus crisis. The S&P 500 Utilities has lost almost 7% in the last 52-week period, losing around 3% in the past one month.
Meanwhile, the S&P 500 Financials is down 12% in the last 52-week period, losing 2.5% in the past month. Banks have been severely hit by the near-zero interest rate set by the Fed and ECB and the need to take provisions of billions of dollars for future credit losses.