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The stock market is all wrong about technology stocks — but not in the way you may think.
It can be hard to follow investors' on-again, off-again love affair with technology stocks. In the short term, the market is parsing every detail about trade, inventory levels, and data security, sending tech stocks on a volatile ride.
However, when it comes to investing, incremental data is critical but often sheds light on only part of a much bigger picture. As long-term investors, we cannot overstate the importance of the structural changes happening in our world related to the use of technology.
We are in the beginning stages of the fourth industrial revolution, which is characterized by a range of new technologies that are fusing the physical, digital and biological worlds. More significantly, as we dissect in our firm's 2019 capital markets forecast, this revolution is embodied by horizontal digitization — that is, the expansion of technology into every discipline, business model, and supply chain, bringing flexibility and immediacy to the way consumers receive goods and services.
This is not to say we should ignore risks of supply-chain disruption or a premature end to the capital expenditure cycle, but we also must keep our sights on where we are going over the next decade: to a place where every device, process, and service will be connected and critically dependent on technology.
As with all things, labels are important but can be misleading. "Tech stocks" are often discussed as a homogenous group of companies, but the lines are blurred and will only become more so. Amazon and Google-parent Alphabet reside in the consumer discretionary and communications services sectors, respectively, and are understandably given passes as tech companies. But who is to say that Dominos, a self-described "tech company that sells pizza," or a bank using blockchain to clear payments faster, are not also tech companies?
Some of the most interesting ways of investing alongside the fourth industrial revolution are not in traditional tech companies, but rather hidden in other sectors. Investors need to fundamentally update the way they think about investing in technology, looking for opportunities in, for example, the pharmaceutical company that integrates big data into their drug research, or the transportation company that is transforming the trucking industry through the use of self-driving vehicles. This is a more difficult approach and will require careful analysis of individual business models, but the long-term payoff could be lucrative.
There are more macro implications for horizontal digitization. We see widespread technology and dissemination of information as contributing to lower inflation and higher productivity, which is likely to keep inflation from running away from the Fed, even in an extremely tight labor market.
In our view, productivity is the key to the economic cycle extending beyond 2019. We expect the tech-related investments made earlier in the post-crisis recovery will begin yielding higher productivity. It is also possible that productivity is higher today than we realize; it is common for productivity data to be revised significantly down the road, and we think today's broad adoption of technology is making productivity particularly difficult to accurately measure.
It is important to look past some of the gyrations in the market and stay focused on the productivity and long-term profitability likely to be realized by those companies enabling and embracing this next revolution. Overall wealth planning must keep pace with the rapid evolution of the business landscape, exogenous risks, and one's personal goals.
Meghan Shue is senior investment strategist at Wilmington Trust and a CNBC contributor.