Tech Tanks as Investors Rue the End of the Liquidity Punchbowl

Written on 11/01/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

The tech-focused Nasdaq Composite has shed close to 7% already this year, the worst annual debut since fears of a slowdown in China sent shockwaves across global financial markets six year ago.

It is the sharp rise in bond yields that has grabbed every investor’s attention and a potentially more hawkish US Federal Reserve who the market now thinks will raise rates at its March meeting and three more times across the new year in order to tame hot inflation. In turn, sector rotation out of tech stocks and into value sectors has been the name of the game, though a more severe selloff across all sectors can’t be ruled as the liquidity taps run dry. It seems that the fabled punchbowl of endless central bank stimulus really is going to be taken away, and much sooner than many have previously thought.

The prospect of higher rates lowers the appeal of the tech sector as high growth stocks are particularly sensitive to policy tightening that crimps future earnings potential, in turn knocking the sector’s high valuations. Big cash flows far into the future are worth relatively less when rates rise, so growth stocks and especially more speculative areas of the market which carry high expectations for distant cash flows, get hit harder.

The S&P500 Information Technology index, made up of the some of the biggest names in Silicon Valley, has fallen nearly 7% already this year, while recent initial public offerings are down nearly 12%, according to indices collated by top investment bank, Goldman Sachs. The flagship “Ark” fund run by once market darling Cathie Wood has been caught in the epicentre of the tech selling. It has dropped around half its value, a fall worse than the one the fund saw in March 2020 during the low of the pandemic.

As yields have risen, those previously unloved value stocks more linked to the reopening phase have been bought into, as investors shunned high-growth companies that were all the rage at the height of the crisis. Shares of banks, energy stocks and major industrial groups – those set to benefit with the opening up of the US economy – have taken off. The S&P bank index hit a record high yesterday and value stocks as a whole even managed to eke out a gain last week while the broader all closed in the red for the year.

The bumpy ride may continue as focus is fully on the Fed, with its recent hawkish minutes pushing markets into pricing a material chance of a rate hike this month. Perhaps Fed Chair Powell’s Senate testimony, as part of his re-nomination process, could douse the hawkish atmosphere and heal some of the carnage in the more speculative parts of the market if he said that policy adjustment might be more gradual. Then again, Wednesday’s US CPI is expected to hit near 40-year highs and potentially add to expectations of an imminent Fed lift-off.

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Lukman Otunuga

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman provides in-depth analysis on the global currency and commodity markets and is often quoted by leading international media outlets such as: MarketWatch, CNBC, NASDAQ, Reuters, AFP, The Guardian and Yahoo. Prior to joining FXTM, Lukman spent two years as a research analyst with international currency broker FXCM, where he focused on a technical and fundamental analysis of the global currency, commodity, and stock markets. Lukman was also responsible for leading educational seminars for international and local high net worth individuals, and has published a series of educational articles on forex trading with City A.M. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions