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***But what about the sectors that have been hemorrhaging capital – specifically, tech?

Tech stocks have powered the returns of countless mom ‘n pop portfolios over the last decade. Does this shift in the Fed’s monetary policy mean the tech ride is over?

For that, let’s turn to our hypergrowth specialist, Luke Lango.

For newer Digest readers, Luke is the analyst behind Early Stage Investor. His specialty is finding market-leading tech innovators that are pioneering explosive trends, capable of generating outsized investor wealth.

Of course, tech innovators are especially sensitive to interest rates. That means the market environment we’re entering could mean more pain for tech investors.

So, what are we to make of all this?

It boils down to one general idea…

Yes, “tech” is likely in for more selling pressure, but specific, elite tech stocks are going to be fine. However, this distinction means it’s critical to know which type of tech you’re holding.

Here’s Luke to present the macro case against the average, bread-and-butter stock:

Right now, investors are fearful of the Fed pulling liquidity out of the market in 2022 via both rate hikes and a balance sheet run-off – two things that pretty much all Fed members agreed were appropriate to do in the coming year.

Not especially encouraging.

So, how should a tech investor respond?

***In writing for his Early Stage Investor subscribers, Luke points out the differences between the holdings in their portfolio versus an “average” tech stock that could be a portfolio timebomb

The differences serve as a helpful litmus test you can use to evaluate the tech stocks in your own portfolio today.

The first is valuation.

Have your tech stocks already sold-off down to more attractive valuations? Or do prices remain lofty, leaving them vulnerable to a sharp correction?

Here’s Luke describing the stocks in his Early Stage Investor portfolio:

The valuations on (our) stocks have already taken a haircut in anticipation of Fed rate hikes. The repricing has already happened.

Luke’s second point intertwines with valuations.

He points toward sales and earnings, which are obviously the denominators in the most widely-used valuation metrics of price-to-sales and price-to-earnings ratios.

Back to Luke:

One of the biggest concerns about the market is that it needs earnings growth to be robust in 2022 to offset multiple contraction, but Fed rate hikes will likely hamper earnings growth by throttling consumer demand and the economy.

As you look at your tech portfolio, where’s the growth coming from? Is it dependent on a robust economy? Or will broad secular tailwinds support it?

Third, remember to maintain a big-picture perspective.

Unless your specific circumstances require you to pull money from the market in the short-term, it’s important to think “multi-year growth story.”

From Luke:

The most important thing to remember here is that, while it may seem like all the market cares about today is the Fed, this is really just noise in the big picture. It’s a near-term event that will pass.

***Putting it all together

Let’s sum up…

If we look at what’s happening in the broad market, strength remains. We’re just seeing money sloshing around.

Here’s John and Wade’s bottom-line:

We expect the S&P 500 to consolidate above its up-trending support level at 4,720 as Wall Street gets ready for earnings season to kick off in mid-January.

And zeroing in on tech stocks in particular, it’s time to make sure your holdings are rooted in fundamental strength. The broad tech sector is running into headwinds, so we can’t count on a rising-tide-lifts-all-ships environment.

You want only the strongest tech, boosted by powerful organic earnings driven by secular growth stories.

Here’s Luke’s simple sum-up to take us out:

In the long-run, good businesses that make good products and services are the best investments.

Have a good evening,

Jeff Remsburg

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