Breakout or breakdown? Why the Nasdaq’s two decade leadership cycle may withstand rising rates

The Leuthold Group’s Jim Paulsen has a message for investors: Don’t give up on Big Tech.

According to the firm’s chief investment strategist, Nasdaq volatility associated with rising Treasury Note yields may not be enough to permanently derail its two decade leadership cycle.

“It’s quite a coincidence that that same peak we had three weeks ago in both the Nasdaq and S&P 500 technology index… to the overall S&P occurred also right on the same level as the dot-com top a little over 20 years ago,” Paulsen told CNBC’s “Trading Nation” on Friday. “That relative high has been enforced ever since.”

In a recent note to clients, Paulsen tackled whether growth plays, which include Big Tech, were “peaking out” or “breaking out.” He found support for both scenarios. But Paulsen believes it’s more likely the group will endure through higher rates.

“It might have less to do with yields than it does with just facing a glass ceiling,” he added. “I’m not totally convinced that we’re breaking down. We might just be hitting the ceiling, bouncing down for a minute and maybe going to take it out yet at some point here in the future.”

Paulsen contends Big Tech and growth, which he classifies as “New-Era” stocks, will retain their attractiveness to investors.

“If it does ultimately achieve a new relative-price high, might its leadership persevere and perhaps even strengthen? That is what happened the last two times the Nasdaq spent multiple years as an underperformer,” he wrote.

Despite his optimism, Paulsen acknowledges it’s reasonable to expect a phase of underperformance, consolidation or even a temporary meltdown.

“It’s important to realize that we’re just one year into this new economic expansion — probably both the expansion and the bull market are going to be a multi-year event in which tech will continue to play a fairly dominant role,” he said. “During the periods of time where cyclicality takes a hit and it’s going to in periods, I think tech is going to hold up your portfolio.”

So, Paulsen, who oversees about $1 billion in assets under management, isn’t bailing on Big Tech.

“We’re underweighted tech, but not by a lot,” said Paulsen, who is overweight areas such as small caps, value and international stocks. “It’s likely to underperform over the next year as the economy really booms here, but I’m not totally sold that it will.”

On “Trading Nation” last September, Paulsen, a long-time market bull, recommended taking advantage of Wall Street pessimism while you still can. Since that appearance, the Nasdaq is up 20%, and he’s maintaining his enthusiasm.

“It’s still going to be the leader of the future,” Paulsen said.

The Nasdaq dropped 0.6% to 13,319.87 on Friday as the benchmark 10-year Treasury Note yield hit 1.64%, its highest level in 13 months. But the tech heavy index, which is 6% off its all-time high, still ended the week up more than 3%.


Source: CNBC