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Is it time to jump back on the tech train?
Following the shock, US inflation reading this March came an avalanche of panicked investors offloading their riskiest assets as quickly as possible. They became spooked by the onset of high inflation, surging prices and the real possibility of rising interest rates. It was something the market had not dealt with for decades. So, this sudden onset of inflation, caught the market off-guard and unprepared. As a result, global markets were shaken to the core, resulting in one of the biggest selloffs in tech and cryptocurrency history.
The Australian tech sector tumbled back to pre-Covid levels, like its US counterpart. The so-called ‘safe haven’ asset Bitcoin, was torn to shreds along with many other cryptocurrencies. The tech sector crashed twice. The first crash was pandemic related and not specific to the sector. Technology stocks fell 49 percent from their February 2020 highs, and into the Covid lows of March 2020. Following on, the tech sector recovered by 200 percent into February 2021 but the onset of inflation caused the second crash, falling 44 percent into May 2022.
From semiconductor companies to Buy Now Pay Later platforms and social media giants, big tech in the US lost $1 trillion over three trading sessions. Trading on ridiculously high PE valuations, tech companies that failed to meet earnings expectations, were tossed out with the trash. Casualties in well-known names started to emerge: Z1P Co (ASX:Z1P), Sezzle (ASX:SZL) and Laybuy Group Holdings (ASX:LBY) went from hero to zero in the blink of an eye.
It goes without saying, the tech sector is highly volatile. But with volatility comes higher returns. The technology sector has been the best performing sector since the GFC, returning over 300 percent since December 2008. The question is, where is tech likely to go over the next 6-12 months?
Following the US June inflation reading, was a sharp rally in tech stocks that had analysts scratching their heads. The tech-heavy Nasdaq Composite rose 2.28% on Thursday, boosted by Samsung’s 11% profit surge sending shares in AMD +5.2% and Nvidia +4.8%. Some are saying this could be the start of a sustained tech recovery, supported by rising demand brought on by Chinese consumers coming out of covid restrictions. Demand for tech services could start to rise instead of tech products bought during the pandemic.
Another great leading indicator is Cathie Wood’s tech fund.
After watching her flagship ARK Innovation ETF implode in spectacular fashion during the tech crash, Woods has stuck to her guns by holding onto the growth-focused stocks despite tremendous pressure to sell. Now, Woods is predicting the Fed will pivot and reverse policy due to deflationary pressures. All the while, her fund closed the month up over 18 percent versus a 1.7 percent rise in the S&P500 Index. Here are some of the main stocks in the fund:
| Holdings | Holding | After hours % |
| Zoom Video Communications, Inc. Class A | 9.65% | 0.67% |
| Tesla Inc | 8.34% | 0.54% |
| Roku, Inc. Class A | 8.11% | 0.92% |
| CRISPR Therapeutics AG | 5.34% | 1.50% |
| Teladoc Health, Inc. | 5.03% | 1.08% |
| UiPath, Inc. Class A | 4.90% | 1.20% |
| Exact Sciences Corporation | 4.63% | 0.26% |
| Intellia Therapeutics, Inc. | 4.39% | 0.44% |
| Block, Inc. Class A | 4.25% | 0.75% |
| Coinbase Global, Inc. Class A | 3.76% | 0.90% |
| Shopify, Inc. Class A | 2.73% | 0.98% |
| Robinhood Markets, Inc. Class A | 2.04% | 0.49% |
| NVIDIA Corporation | 0.80% | 0.94% |
Technology stocks do appear to be bouncing off their lows in what some are calling a recovery rally. Despite the short-term bounce, there is still a long way to go before investors can confidently return to the sector. After this week’s stubbornly high inflation figure, the Federal Reserve is taking an even more aggressive approach to curbing inflation. Rising interest rates are usually negative for tech stocks, especially those in the growth phase with no earnings. Additionally, the big tech giants along with the rest of the sector will post 2Q earnings over the next few weeks. Expectations are still high for the tech sector which means, earnings miss and down the rabbit hole, it goes.
For that reason, the tech sector is not out of the ‘Woods’ yet. Rising interest rates will continue to be a significant headwind for the sector despite this short-term relief rally.
