Semiconductors. They’re kind of a big deal. You’ve probably heard of them. They’re in everything, and they’re all the financial world can talk about nowadays.
But what, exactly, are they? Well, technically, they’re a material that conducts electricity, but only sometimes. They’re kind of like an electrical gatekeeper. By adding tiny amounts of other elements and applying voltage, engineers can control exactly when and where electricity flows. In other words, if electricity is like water flowing through pipes, semiconductors are the valves that control the flow.
It’s kind of crazy to think about, but our modern society runs on billions of these microscopic valves switching on and off billions of times per second.
So it probably comes as no surprise that demand for these semiconductors, or “chips,” has been absolutely off the charts in recent years. As our chart above shows (in green), the year-to-year change in the Philadelphia Semiconductor Stock Index just hit 170%.
This is important because it generally leads to broader manufacturing demand. In our modern era, when manufacturers plan to ramp up production, they order semiconductors first, often 6–12 months in advance due to long lead times.
The takeaway from the chart, therefore, is that the economy is strong and is likely to remain strong, simply due to the massive investment in semiconductors right now.
Whether that turns out to be true remains to be seen. But one thing is for sure: the stock market is definitely loving it.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The ISM Manufacturing PMI is a diffusion index published by the Institute for Supply Management that measures the health of the U.S. manufacturing sector, with readings above 50 indicating expansion and readings below 50 indicating contraction.
The Philadelphia Stock Exchange Semiconductor Index is a modified market-capitalization-weighted index that tracks the performance of major companies involved in the design, distribution, manufacture, and sale of semiconductors.