By John Stewart
Chief Investment Officer at Farmers Trust Co.

Week in Review: Tech Wreck

I’ve warned many times on Investors Edge about getting too many eggs in one basket, as well as chasing what the crowd is chasing higher.

Many investors have been WAY overinvested in the tech sector due to its strong performance in recent years, as well as all the hype around AI.

The past is not always a guarantee of what to expect in the future, however, and stocks have a tendency to pull forward returns – that is, AI growth was already priced in (and then some) heading into this year.

All the market needed was a catalyst – and that catalyst seems to be that AI will make software far less exclusive, putting substantial downward pressure on software companies’ margins – Microsoft is the most well-known company in this space; its stock is now down more than 25% from its peak last fall.

Given that software companies buy a lot of chips and other hardware, it puts the whole tech ecosystem into question.

The tech-heavy NASDAQ index is down roughly 6% this past week and is now down more than 2% since the beginning of the year.

There may be more room to the downside in the big over-owned tech names, but of course as markets always do, this correction will eventually run its course and present another buying opportunity.

This isn’t the first time rebalancing has come up as a featured insight, and it won’t be the last.

A key component of risk management in any investment portfolio is to ensure that you properly rebalance your exposure to any one asset class, sector or stock.

This involves trimming what has grown too large in weight (harvesting profits) while adding exposure to areas that have underperformed and represent a potential value opportunity (buy low).

This instills a disciplined process to buy low and sell high and ensures that you never let your portfolio become too concentrated in any one area.

I’ll bet many investors who let technology grow too large in their portfolios are wishing they would have rebalanced prior to the recent slide in tech stocks.

Looking Ahead: What’s Up with Inflation?

Most consumers think inflation is still a major issue because prices of most of the goods and services they purchase are not coming down.

Of course, inflation is the rate at which prices are going up, so if prices are stable, that would translate into an inflation rate of zero.

Next week, we’ll learn what the consumer price index, or CPI, did for the month of January.

The expectation is for a rate of inflation of 2.7% for the past 12 months, or 2.6% for the so-called “core” inflation rate, which strips out food and energy prices.

This rate has been falling steadily for the past few years now, but the rate of slowing has also slowed, with inflation still stubbornly above the Fed’s 2% target.

If the number is higher than expected, the Fed may stay on hold with any further interest rate cuts; on the other hand, a lower number would bring more rate cuts back into the conversation.