Investors in the first three weeks of the new year – 2022 turned their back on tech stocks prompting Nasdaq to drop 7.6% last week. The market recorded its steepest one-week decline since 2020. So far in 2022, it’s off 12% with experts describing it as the index’s worst start through the first 15 trading days since 2008.
Lo Toney, the managing partner for Plexo Capital, said the expectation of rising interest rates has sent investors fleeing from growth and toward less-risky areas. “We have the multi-sector investors, who are moving out of tech because with a rising interest rate environment, they typically move to other sectors that benefit from rising interest rates – financial and insurance,” he said. “What we see is that high-interest rate environments really punish the growth stocks, in particular, the tech stocks.”
Toney highlighted that tech companies most at risk are those that have been trading on revenue growth, rather than profitability. George Lucas, the joint CEO of Raiz, believes the slow start was a reflection of market concerns. He said times are changing as countries reopen from the COVID-19 pandemic. “Central banks are becoming less accommodative to support economies and are preparing to hike interest rates.”
Lucas says it has a lot to do with liquidity as well. “Towards the end of last year, as inflation increased, cash began to get move expensive. Economies began to open up and banks became more worried about inflation, worried that what we are seeing is not transitory,” he explained. “These changes are now being absorbed by the equity and bond markets, and have contributed to the recent sell-off in global bonds, a sell-off in technology stocks and a sell-off in shares of non-profitable companies.”
Dan Ives, a tech analyst on Wall Street, says long-term tech trends take time to develop and execute. “Short-term focus and gyrations part of the process. Valuations become an emotional debate between bulls and bears, that’s what creates a market. Macro and rising rates add to jitters,” he tweeted.
Ives said the sell-off in the sector has been broad. “It has set up a potential buying opportunity for investors who can use the drop to scoop up quality companies, but only if their earnings give them a reason for hope. The underlying growth drivers of the tech space are unmatched to anything we have seen since the mid-1990s and not being priced into stocks at these oversold levels.”