This week, I wanted to highlight analysis from my friend and well-respected colleague, Mary Ellen McGonagle! She primarily focuses on stocks with a 2-week to 9-month horizon depending on market conditions.
Check out her guest newsletter below to learn more.
As Semiconductors Go – So Goes the Markets
Historically, Semiconductor stocks have been a key barometer for the broader stock market and the economy. Chips are used in a broad range of industries that are important for growth: appliances, data centers, gaming and artificial intelligence to name a few.
If conditions are weak for chips, it raises questions about demand in other areas of the economy.
This year, heavyweight chip companies such as Nvidia (NVDA) and Micron (MU) have been warning of a slowdown in chip demand, which is pushing these and other Semiconductor stocks down sharply.
This is in contrast to last year when we were facing a shortage of chips that led to tremendous outperformance in the Semiconductor group as demand outpaced supply.
As you can see in the chart above, Semiconductor stocks have taken a beating this year with a year to date loss of 37%. This weakness in the group could be a signal that the economy is due for a slowdown and may be heading for a recession.
What should investors do now?
This will depend on your investment horizon. Chip stocks are clearly heading lower over the near-term and shorter term investors would be advised to lighten up on any positions. Longer-term investors can take heart in the fact that Semiconductor stocks have led the markets out of every bear market going back to 2000.
Semiconductors are the brains of modern electronics, enabling technologies that are critical to U.S. economic growth. In addition, Semiconductor components have driven advances in many industries ranging from computing, health care, transportation.
Demand for the chips and equipment that these companies provide will not evaporate but instead, demand will continue to build as their applications expand to newer areas such as Electric Vehicles and Alternative Energy production.
While the near-term outlook for Semiconductors is negative, when the markets turn long-term bullish again, be sure and have these stocks at the top of your Watch List.
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