Chart of the Week: 2022 Kicks Off with Heavy Selling of Tech Stocks

January 7, 2022

In the US stock market, technology stocks led the declines as investors were welcomed in 2022 with a sea of red.

Rising US Treasury yields prompted investors to rotate out of high-growth tech stocks that are rate-sensitive.

The sell-off was driven mainly by hedge funds that have been unloading high-growth, high-valuation stocks since the end of last year.

It is also worth noting that a near-record number of tech stocks have seen a decline of 50% from their one-year high during the heavy drawdown.

According to Sundial Capital Research, roughly four of every 10 companies on the technology-focused Nasdaq Composite Index have seen their market value cut in half from their 52-week highs.

Potentially faster rate hikes drives red days

In a way, the sharp decline wasn’t really a surprise since the talk of rotation from high growth stocks to value stocks have been ongoing for a while now since we noted signs that inflation is here to stay.

While there has been expectation of rising rates in 2022, the recent minutes from the Federal Reserve (Fed) showed that a strengthening economy and elevated inflation could lead to earlier and faster interest rate hikes.

Now that the Fed minutes indicate that faster rate hikes are on the cards, this has triggered the selling of tech stocks (see below).

From what we saw, most investors and traders opted for a “sell-first, think-later” approach.

What is surprising is the overreaction of the market. I can’t say that it is the first time I’m seeing this.

In fact, we have seen a similar sell-down in tech stocks back in March 2021, before a quick rebound after that.

No need to press the panic button

I don’t think that long-term investors should go into panic mode.

In fact, I agreed with what Tim spoke about yesterday with regards to price power when it comes to “Inflation and Stocks”.

I think it gives a perspective on what to look into amidst the inflationary environment.

I also think that the sell-down offers opportunities for investors to buy some of these high-growth stocks at a much more reasonable price.

Aside from that, the rotation away from tech stocks is a good development in a bull run over the last few years that has seen dominance by tech giants.

Another reason to be optimistic is that growth remains on track with the gradual reopening of the economy.

In fact, the US jobs data came in much stronger than expected and the Omicron Covid-19 variant is considered to be milder than its previous iterations.

While stronger economic prospects could prompt investors to shift into value stocks, profitable tech companies with strong cashflows will also benefit from the better economic outlook.

Source: Bloomberg.com

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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