By Jonathan Paglialunga, Director of Operations
With the start of 2022 just beginning, United States Technology Stocks are seeing the worst performance at the start of a year since 2016, fueled by runaway inflation and its detriment to the industry’s future.
Reaffirmed by this trend, the Nasdaq 100 index, which includes many colossal technology stocks, is down more than four percent this year. Even the broader Nasdaq Composite Index fell for the third straight week.
Notable high-growth stocks are being negatively affected by the growing ideology that the U.S. Federal Reserve will soon begin to withdraw massive monetary funding that has kept the financial system flooded with cash since the start of the pandemic.
This emerging conviction was backed by recent data finding that displayed that U.S. consumer prices surged last year by the most since June 1982 while U.S. retail sales fell in December by the most in 10 months. This data suggests that higher prices are a large factor in dissuading potential consumers which puts pressure on tech stocks with valuations based on future profit growth, since higher interest rates reduce the present value of those expected earnings.
According to Douglas Porter, the chief economist at BMO Capital Markets, “The Nasdaq has stumbled out of the gate in 2022.” Furthermore, Porter explains that companies facing the prospect of future earnings face “the cold calculation of being discounted by current yields, so the Fed’s sudden turn is a clear-cut headwind for lofty valuations.”
The market is expecting the Federal Reserve to start raising interest rates in March while seeking to remove a source of support for the Treasury- Bond markets by reducing its stockpile of bond holdings in the second half of the year. Federal Reserve chair Jerome Powell told the Senate Banking Committee that he’s willing to raise interest rates more than expected if needed to get its runaway inflation under control.
Commenting on this unprecedented inflation, Randy Frederick, vice president of trading and derivatives for Charles Schwab & Co. stated, “Inflation has gotten really high, to multi-decade highs, and that’s really become a problem for the market. We’re going to get a rate hike in March, but that is still a ways out, and the market could continue to struggle if inflation remains high in the meantime.”
Even amid the recent volatility, the technology sector still aggressively outperforms the rest of the overall market. Since the start of 2021, S&P 500 information technology index is up 27 percent, the Philadelphia Stock Exchange Semiconductor index is up nearly 40 percent, and the overall S&P 500 index is up about 24 percent.
One exception to the success of the technology sector is the software industry, which has seen investors rotate out of high-valuation growth shares and toward quality stocks like Apple and Microsoft. Frederick argues, “we have to see a stabilization in rates, and more certainty about what economic data looks like overall, before you’ll see people move back into these growthier names. Valuations have come down a lot, but it may take a little bit of time before they come back.”