The US stock market index is the most widely tracked measure of technical stock prices.
Tech stocks have been the leaders of the rally global stock market From March 2020. In just 20 months, the NASDAQ Composite rose from 7,000 to 16,000.
Major Technical Stocks Distributed multibagger returns over 2020-2021.
But this year the situation has completely changed. Tech stocks have been the leaders of market declines. Most US tech stocks are down. Many more are down that index. Some have lost more than 50% of their market cap.
Well-known, highly popular stocks such as DocuSign (-79%), Etsy (-75%), Moderna (-75%), PayPal (-75%), Netflix (-74%), and Zoom Video Communications (-74%) %), are the biggest losers.
And what about the biggest tech stocks?
Well, from its all-time high, Apple is down 25%, Goggle is down 28%, Amazon is down 41%, Nvidia is down 50%, and Meta (the core of Facebook) is down 59%.
These are huge losses. And there could be further declines in store.
In the latest earnings call, the management of these firms has warned of a fall in revenue and profits. This only adds to the concerns about a slowdown in their growth that is already underway.
Also, the latest investments made by these firms in futuristic areas like Artificial Intelligence, metaverse And as such are still unproven. It can take years for revenue and profits to grow to a significant level.
Then there are other issues such as trade disruptions due to the Russo-Ukraine war and global semiconductor shortage Which is likely to expand well into 2023.
The latest concerns from investors include rising inflation, rising interest rates and declining consumer spending. These are all the reasons for the decline in the stock market.
To add to this there is a fear in the market of the US economy sinking into recession. In fact some market gurus believe that the US is already in recession.
The US economy shrank in the January-March quarter. Recession is defined as two consecutive quarters of decline in GDP growth rate. Thus, if the GDP growth numbers for the April-June quarter (to be announced at the end of July) are also negative, it would confirm that the US is in recession.
This would be extremely bearish news for tech stocks that have already fallen into a bear market. It’s no surprise that investors don’t want to touch these stocks.
So what can we learn from this debacle?
, What goes up must also come down
2022 will be remembered as the year when investors woke up to the fact that markets do not move in a straight line.
If an asset has outgrown its fundamentals, the potential for a crash is high. The only question is the timing of the correction.
2020 and 2021 were historic years for tech stocks. The Tech Rally brought back memories of the tech boom of the 1990s. But this time there was a difference.
You see, technology as a sector in the 1990s was not a big part of the benchmark indices in the US. This time he was the backbone of the market. Not only were the stocks bigger in terms of market cap, but they also outperformed.
This means that most of the common investors had already joined the rally and were making profits from it. When the momentum reversed in these stocks, they were hit hard.
This brings us to the next lesson.
, Size is no guarantee of safety
It is natural for investors to think of large bluechip stocks as a safe investment. But when even these stocks are giving great returns, the temptation can be overwhelming.
When companies dominate their market and are well understood by analysts, why bother doing any research or due diligence?
Retail investors thought they couldn’t be wrong because they were buying the big stable tech companies that were changing the world.
This is not a smart way to invest. Largecaps do not guarantee returns for the investor, even if they are widely held and favored by the market. Just look at Amazon and Tesla.
, The hottest stock may not be the best stock
A big reason for the huge boom in tech stocks was that they had a great story to tell.
They wanted everyone to believe that they were changing the world. Thus, the potential increase in revenue was unlimited.
It was a good story and it helped propel their share prices higher.
But the problem with story-driven stocks is that if the story changes, the stock crashes. Even worse, the stock’s crash doesn’t have to change the company’s story. The change in market sentiment is substantial.
Just look at Amazon. Its business has not changed in 2022. The story is unchanged. But the stock has crashed because the market sentiment has changed. And when that happens, the stocks that rise the most tend to fall the most.
So over the long term, the hottest stock may not be the best… even if the business lives up to expectations. This is an important lesson to remember.
, interest rates matter
The risk free interest rate is like the force of gravity in the stock market. The higher it goes, the more difficult it is for stock prices to rise.
And the most important interest rate is the return on 10-year US government bonds. It has been increasing continuously since last year. It was only a matter of time before smart money became cautious.
This is the reason why foreign investors have been selling Indian shares since mid-2021. They knew that interest rates were going to rise due to higher inflation and that would mean lower stock prices.
And the stocks that will be impacted the most will be the ones trading at higher valuations. In this case, Tech Stock.
Keep these lessons in mind. Investors who learn these lessons will have an edge over those who don’t.
Happy investment!
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from equitymaster.com