An employee rides her bike past a logo next to the main entrance of the Google building in Zurich.CHRISTIAN HARTMANN/Reuters
The stock market is selling off but it shouldn't be anything more than one of those corrections in an ongoing bull market. A real bear market requires an inflation problem that central banks are trying to tame with interest-rate hikes. We are far from that point: inflation remains below central-bank targets in most countries.
Moreover, inflation expectations have recently collapsed. A widely followed gauge of inflation expectations – the premium in 5-year U.S. Treasury bond yields over 5-year U.S. Treasury inflation-protected bond yields – is now at a 15-month low. If anything, this plunge gives the Federal Reserve more room to shift to a dovish stance.
But even if rates begin to rise in 2015 as generally anticipated, stocks should still keep going up for quite some time. If history is a guide, the market peak "is usually a good three years after the initial Fed volley," says Gluskin Sheff economist David Rosenberg. "The shortest lag was in the late 1960s, at a year and a half."
The period when the stock market and interest rates are both going up is also when the economy is also gaining momentum. We saw signs of a pick-up before the recent market sell-off, with U.S. job growth averaging more than 200,000 a month in 2014 and the Conference Board's leading economic indicator jumping to a 4-year high.
In the next upleg of the bull market, technology stocks should emerge as leaders, going by the past track record. Mr. Rosenberg, an old hand who has been following the market for more than two decades, says "technology is the sector that goes up most when the economy is picking up and long yields are rising."
That's because the capital expenditure (capex) cycle kicks into gear as companies respond to surging demand by ratcheting up spending on new facilities, machinery and equipment. A large chunk of the latter is information technology, software, telecommunication systems and other technology-related items.
Another reason to expect higher capex is the sorry state of the U.S. capital stock. The average age of machinery and equipment is 7.4 years – the oldest in nearly twenty years reports Liz Ann Sonders, a Charles Schwab & Co. investment strategist. This is "at historical peaks."
Yet another reason for optimism is the spending power implicit in the huge cash balances on corporate balance sheets. The $2-trillion in cash on U.S. corporate balance sheets is "at levels unseen since World War II," observes Ms. Sonders.
So we might not only stay invested during the current market correction but also see it as an opportunity to tilt more toward technology stocks. One way is via the Technology Select Sector SPDR (XLK), the most liquid of technology exchange-traded funds (ETFs).
The management expense ratio for XLK is 0.17 per cent and the dividend yield is close to 1.4 per cent. The ten most heavily weighted companies (by market cap) are: Apple Inc., Microsoft Corp., Google Inc., IBM Corp., AT&T Inc., Verizon Communications Inc., Cisco Systems Inc., Oracle Corp., QUALCOMM Inc. and Intel Corp.
Disclosure: Author owns the Technology Select Sector SPDR ETF