Tariffs are unhealthy for economies and other living things.
This is especially true for the tech economy, which for 30 years has become increasingly dependent on trade between the U.S. and China, American minds serving Chinese factories with software and designs.
Rising tariffs on Chinese imports is throwing dirt at a working engine. It’s easy to see by examining what the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) invests in . Its biggest holding, with almost 12% of the assets, is Taiwan Semiconductor Manufacturing (NYSE:TSM). Second is Intel (NASDAQ:INTC).
Over the last three months Taiwan Semi is up almost 23%, but it’s hard to see that continuing as the tariff burden grows. It’s going to be a bumpy ride.
Winners and Losers in SMH
The fate of the industry may best be revealed by Nvidia (NASDAQ:NVDA), which is up 11% on the quarter but has been falling in September. Micron (NASDAQ:MU), the memory chip maker, has also rolled over, down 15% for the quarter.
KLA Tencor (NASDAQ:KLAC), which makes the machines that make the chips, is flat for the quarter, and lost a fat gain as tariff news began to bite. Applied Materials (NASDAQ:AMAT) and Lam Research (NASDAQ:LRCX), the other big names in the chip machine business, are also flashing red.
If factories are slowing their purchases of chip-making equipment, it must mean trouble ahead for the companies that design those chips. Sure enough, ASML Holding (NASDAQ:ASML), Broadcom (NASDAQ:AVGO), and Texas Instruments (NASDAQ:TXN) are all down for the quarter.
There are exceptions. Advanced Micro Devices (NASDAQ:AMD) and Qualcomm (NASDAQ:QCOM) chose the most recent quarter to break out to huge gains, AMD on the strength of Intel’s weakness, Qualcomm on the end of its takeover dramas.
Stock pickers, in other words, had an ample chance of beating the averages during the quarter and making money in semiconductors.
Long Run, Short Run
For investors in their 30’s, 40’s or even their early 50’s, SMH should remain a core holding. The industry is as solid as it has ever been, and over the last five years SMH is up 167%. It has even paid investors some small dividends. For the year so far, it’s up 8%.
But for older investors who can’t take a loss, these are troubling times. No one knows how long the tariff wars will continue, nor how bad they’re going to be. The semiconductor business was built on free-flowing global trade, and it’s now too late to move factories back to the U.S. There’s just too much invested in China.
Morgan Stanley (NYSE:MS) analysts estimate chip stocks get 52% of their revenue through China, and this is led by some of the hottest names in the business, like Nvidia and Qualcomm. In the near term, it makes the sector very vulnerable, according to Zacks, so it may be time to take profits here and put them in short-term government bonds, where yields are rising as the Federal Reserve raises interest rates.
If I were, like my kids, in my 20’s and just starting off as an investor, SMH would be one of the names that would be at the top of my list to buy. Patience will be rewarded.
Even for older investors, there should be reasons for optimism. The current super-cycle of clouds using artificial intelligence to extend their reach into previously inanimate objects, from health sensors to cars, is going to transform the world we live in over the next five years.
But there’s a storm brewing out there in trade land, and it may be time to batten down some hatches if you don’t want your portfolio springing a leak.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.