Shares of technology companies are rallying as investors see capital spending for their products strengthening along with the economy, consistent with the Federal Reserve’s latest growth forecasts.
Tech stocks capped their best 10 weeks of relative performance since 2009 last week, and the Guggenheim Standard & Poor’s 500 Equal-Weight Technology exchange-traded fund has outpaced the Guggenheim S&P 500 Equal-Weight ETF by 4.8 percentage points since April 19. The gains show a “hand off” is starting, as investors move into industries that could outperform benchmarks later in the economic expansion, said Brian Jacobsen, who helps oversee $221.2 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin.
“If the Fed is confident enough to begin taking the training wheels off the economy, then that should benefit tech stocks,” he said. Wells Fargo maintains an overweight recommendation on the sector partly because capital spending on these products would improve with increased assurance about the durability of the expansion, he said.
The Federal Reserve Bank of San Francisco’s Tech Pulse Index, which tracks the health of the U.S. information- technology industry, is showing an improvement in investment, consumption, employment, industrial production and shipments. The index rose to 98.96 in May, the highest since 2008.
Unprecedented Stimulus
The equal-weight technology ETF began to lead the benchmark index shortly before the Fed started bracing investors for a phase-out of its unprecedented monetary-stimulus program. At the conclusion of a two-day meeting May 1, the Federal Open Market Committee said it was “prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”
Chairman Ben S. Bernanke provided more detail on June 19 when he said the central bank may begin to taper its $85 billion in monthly bond buying later this year and halt purchases in mid-2014 as long as the world’s largest economy performs in line with its projections.
Officials project the U.S. will expand 3 percent to 3.5 percent in the fourth quarter of 2014 from the same period this year, according to their central-tendency estimate, which excludes the three highest and three lowest estimates. The March projection was a range of 2.9 percent to 3.4 percent.
U.S. Growth
Gross domestic product grew at a 1.8 percent annualized rate in the first quarter, revised from a prior reading of 2.4 percent, Commerce Department data show.