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Why Semi Stocks Delivered High Growth before October’s Sell-Off

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Uncertainty pulls the stock market down in 2018

2018 has been a volatile year for the entire stock market. The United States–China trade war has created demand uncertainty. Moreover, the Fed’s interest rate hike made high-value equity stocks less attractive than debt instruments. These two factors caused three major sell-offs in the stock market—first on February 2, second on March 22–23, and third on October 3.

The S&P 500 Index (SPY) fell 2%, and the NASDAQ rose 14% year-to-date.

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Bearish sentiment for the tech sector

The tech sector and the semiconductor industry overcame the first two sell-offs and continued their growth trend. Some semiconductor stocks—like NVIDIA (NVDA) and Texas Instruments (TXN)—reached all-time highs. Intel (INTC) and Micron Technology (MU) reached 18-year highs between May and September. However, the October sell-off took the entire semiconductor industry down to 52-week lows. This sharp decline erased the year-to-date growth and put the industry in bear territory.

Semi stocks haven’t recovered from October’s sell-off

The VanEck Vectors Semiconductor ETF (SMH) rose 6.3% between January 1 and October 2. However, the October sell-off sent SMH down 15% between October 2 and November 20, pulling the year-to-date performance down to -9.7%.

This steep decline came as the United States announced tariffs on some semiconductor components and equipment and many semi giants posted weak earnings or guidance for the December quarter. This weakness raised fears among investors that the high growth of the semiconductor industry has come to an end and the economy is slowing down.

The right time to invest in semiconductor stocks was the end of 2016, when growth had just picked up. The right time to sell these stocks was the third quarter of 2018, when hints of a slowdown started to pinch earnings guidance. In this series, we’ll look at the top three semiconductor stocks of 2018 that earned attractive returns for investors.

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