EXPERTS have warned recipients of stimulus checks to avoid investing in tech stocks, as the $1,400 sum could be wiped out with wrong move.
Since the first stimulus payments arrived in eligible American’s accounts in the spring of 2020, a number of people have turned the federal aid into a small fortune by investing in tech stocks.
However, on Friday Forbes warned against repeating the trend this time around, insisting big money investors are now moving away from the likes of Netflix and Zoom and moving into new corners of the market.
As pointed out by the outlet, betting against the big spenders is a huge gamble – and one that rarely pays off.
Tech stocks are also seriously trailing behind the rest of the market currently, and that’s partly because the coronavirus pandemic is slowing down.
Though the majority of the world is still under some form of lockdown, JPMorgan strategists have forecasted that vaccination rates and seasonal effect could bring an end to the global event as soon as next month.
However, another factor influencing the tech stock decline is economic recovery.
Economic recovery is raising inflation expectations among investors, which in-turn causes bond prices to fall and yields to rise.
This also muddies the waters of the stock market, obscuring the theoretical value of shares, particularly where tech is concerned.
To explain how that phenomenon works, Forbes contributor Dan Runkevicius writes: “At the most fundamental level, a stock’s value is the present value of all the money the company will make in its lifetime. The more a company is expected to earn, the more we can pay for a share in that stock.
“But here’s the catch. The company will make some of that money in a distant future, maybe even 20 or 30 years from now. And a dollar today is worth more than a dollar in the future. So when investors tally up future cash flows, they discount them based on when the company is actually expected to make that money.”
So now that bond yields are increasing, the theoretical value of a stock is decreasing.
This is because the more growth-orientated a stock is, the more its value depends on the potential of its future earnings, and therefore the less it’s worth.
Growing rates also raise the interest on all debt, including corporate bonds, which makes it harder for highly-indebted tech companies – which often take years to turn a profit – borrow money to facilitate growth.
On account of those factors, Runkevicius warns against investing the latest round of stimulus funds in tech stocks for the time being.
Instead, the markets expert says that money will be better spent investing in stocks that typically do well when the economy is growing and rates are rising.
Firstly, any prospective investors should first look at putting their money behind small-cap stocks, which a typically stocks of young companies with a market cap between $300 million and $2 billion.
Small-cap companies tend to have strong growth potentials, but also generally have less stability and market share than larger, more established companies – which are otherwise known as defensive stocks.
However, small-cap stocks often tank during a recession, but fly out of the gate as soon as the economy begins to recover.
According to the Motley Fool, Carparts.com, ACM Research and Yext are three-small cap stocks tipped to be the best to invest in this year.
Another area of consideration lies in the cyclical sectors, such as banking, the travel industry, and the energy industry.
While share prices in airlines and travel companies have plummeted amid a time of both international and domestic travel restrictions, their fortunes will be quick to turn around when normalcy resumes.
