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The Nasdaq, heavy on technology and growth stocks, has been downbeat this year. The index is now off more than 10% from its November record, ensuring the fact that it has entered the correction territory. The Nasdaq Composite has lost 13% this year as investors continue to walk out of the high-growth tech shares as interest rates surge to start the new year. The index also plunged 7.6% last week, marking in its worst week since March 2020. Heavy reliance on the tech sector led to this lackluster performance.
However, as expected, on Jan 26, the Fed signaled an imminent rate hike in March. At the end of Jan 26, 2022, the yield on the benchmark 10-year Treasury note jumped 7 basis points to 1.85%. The yield on the 30-year Treasury bond increased 4 basis points to 2.16%. The yield on the benchmark 2-year Treasury note surged 11 bps to 1.13%.
Higher inflationary expectations emanating from the supply chain disruptions as well as higher crude prices should make Fed members comfortable with several rate hikes in the coming days. Since the growth sector relies on easy borrowing for superior growth and its value depends heavily on future earnings, a rise in long-term yields cuts the present value of companies’ future earnings. Apart from the rate issues, economic reopening amid vaccination and easing Omicron concerns have been pushing investors away from the stay-at-home tech stocks.
Is the Tech Rout Over?
Despite strengthening bets over a March rate hike and some more in the cards, several tech ETFs gained on Jan 26, 2022. This gives cues of an ending rout. After all, the pandemic is showing no signs of turning into an endemic. The next COVID-19 variant will be more contagious than Omicron, World Health Organization (WHO) officials pointed out, though WHO is unsure of its lethalness.
“New normal” trends like work-and-learn-from-home and online shopping, increasing digital payments and growing video streaming are sure to stay for long. The growing adoption of cloud computing, and the ongoing infusion of AI, machine learning and IoT are the other winning areas.
Several industry experts believe that big tech names like Google-parent Alphabet (GOOGL) and Microsoft’s (MSFT) business model is not that responsive to changes in inflation, including the rise in prices for raw materials, chemicals and commodities like gas, plastics, packaging and so on.
Higher transportation charges are also less likely to bother the operation of big tech companies. 5G could be a boom time for Apple as many will upgrade their phones while carriers expand their coverage of the new faster networks.