What happened
Shares of semiconductor stocks Taiwan Semiconductor Manufacturing Corporation (TSM 0.83%), Applied Materials (AMAT 1.58%), and Skyworks Solutions (SWKS +3.70%) all fell hard on Thursday, dropping 2.2%, 4.1%, and 2.8%, respectively, as of 2:40 p.m. ET.
There wasn't much company-specific news today, but since the semiconductor sector is known to be quite cyclical, virtually all chip stocks took it on the chin Thursday, as a combination of macroeconomic data points and Federal Reserve commentary sparked recession fears.
NYSE: TSM
Key Data Points
So what
The markets have been whipsawed in the last few days, amid some conflicting signals. On Tuesday, stocks celebrated as the November Consumer Price Index (CPI) print came in lighter-than-expected. That may have led some to believe inflation was softening enough so that the Federal Reserve would ease off its interest rate hikes, and perhaps lead to a "soft landing," in which inflation comes down without widespread job losses.
However, Fed Chair Jay Powell disabused the market of that notion after yesterday's Fed meeting, during which Fed officials actually raised their outlook for the terminal federal funds rate next year. This is due to a still-hot labor market, despite many consumers pulling back on purchases amid high inflation and interest rates.
Unfortunately, today saw three data points that seemed to indicate central banks would continue hiking even though spending data is weak, boosting the odds of a recession. First, last week's unemployment claims came in at 211,000, below expectations, and still quite low relative to history, indicating a strong labor market. In addition, the European Central Bank came out today with its own 50-basis-point hike, while ECB President Christine Lagarde warned of even more interest rate hikes to come.
Higher interest rates are designed to bring down demand, but on the third data point, U.S. November retail sales showed a 0.6% month-over-month decline, much more than the 0.1% decline expected.
While the services sector is hot, the goods sector is most definitely not, and interest rates may only weaken an already-weak consumer goods market further, That's especially true of consumer technology gadgets, such as the Apple iPhone.
That's why all three of these stocks are down. Skyworks Solutions' broad portfolio of mobile chips is heavily exposed to the iPhone, and Taiwan Semi is the producer of the iPhone Bionic processors and iMac M-series processors. Meanwhile, Taiwan Semi is a customer of Applied Materials, which is the leading producer of semicap machines that make a variety of both logic and memory chips.
The bottom line is that if global central banks hike rates too far and cause a recession, the already-weak consumer electronics sector, coming off its COVID-19 buying hangover, could remain depressed longer than people think.
The macroeconomic news was enough to even offset some positive industry-specific commentary from Evercore ISI analyst C.J. Muse, who wrote in a note today he believes the semiconductor index could be bottoming after a brutal year. Of the three stocks, Muse mentioned Applied Materials as one of his stocks projected to outperform as inventory corrections resolve early next year. Still, the macroeconomic news was outweighing these hopeful comments today.
Now what
It's hard to know where these volatile chip stocks will bottom, but the semiconductor sector could be a great place for long-term investors to look amid market-wide sell-offs, as the sector has sold off more than the market in 2022 amid recessionary fears.
Still, over the long term, it seems likely semiconductors will grow faster than the rate of the overall economy, as chip-heavy applications such as artificial intelligence and electric vehicles seem set for strong growth in the decade ahead.
That's likely why Warren Buffett bought into the chip dip this summer, scooping up shares of TSMC.
