If one was to describe the US stock market in 2022, the words tech wreck comes to mind. Tech stocks are being hammered with a continuous downward trend. This poor performance comes after about an 18-month bull market from the nadir of the COVID-19 downturn.

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The Nasdaq is down (-11.8%), the worst-performing major exchange or indices. According to StockRover*, the Dow Jones Industrial Average (DJIA) is down only (-4.4%), the S&P 500 Index has declined (-7.3%), and the Russell 2000 has decreased (-9.5%) year-to-date (YTD). In addition, the Technology sector is the worst-performing one YTD.

Source: StockRover*

Reality Is Worse

However, the reality is worse than the headline number about the Nasdaq. The top stocks by market capitalization in the Nasdaq are performing well. It is the more speculative names that are performing poorly creating the tech wreck.

The chart below shows that the five largest stocks by market capitalization in the Nasdaq exchange have performed somewhat better than the overall Nasdaq. The total market capitalization of these five stocks is around $8,904 billion, which is more than 25% of the entire Nasdaq market capitalization of roughly $24.56 trillion.

Source: StockRover*

The fact indicates reality is worse for many stocks in the Nasdaq exchange and thus the tech wreck. For instance, some the best performing stocks through the end of 2021 were often speculative and had no profits or were significantly overvalued with too high growth forecasts.

For instance, Affirm Holdings (AFRM) had a solid 2021 but is trading at its 52-week low and down from its all-time high of $176.65. The unprofitable company’s stock price is down (-53.71%) YTD. In another example, Netflix (NFLX) performed well in 2021 but us down (-35.1%) YTD due to more competition and slowing subscriber growth. Similarly, Meta Platforms (FB) had a decent 2021 but is down around (-34.7%) YTD, because of cuts to the top line from iOS privacy changes. In addition, Palantir Technologies (PLTR) is down (-27.9%) YTD on lower expectations.

Interest Rates and Tech Stocks

How do rising interest rates affect tech stocks? The 10-year US Treasury and other rates are trending up. Simultaneously, the Invesco QQQ Trust (QQQ) is trending down. The chart below from StockRover* shows both QQQ and the 10-year US Treasury rate. Although not perfect, a generally inverse relationship between tech stocks and the interest rate is observed. The price of tech stocks falls as interest rates rise and vice versa.

The main reason is that the present value of future cash flows is discounted at the prevailing interest rate. If interest rates are rising, the future cash flows are worth less in the present. Hence, investors are unwilling to pay as much for tech stocks, especially if they are unprofitable or have slow growth. This point usually means tech stocks and 10-year US Treasury interest rates are generally inversely correlated, but not always.

On the other hand, value stocks are more correlated to Gross Domestic Product (GDP) and interest rates. This point is because value stocks tend to be larger, more established companies paying dividends. Hence, they are positively correlated to interest rates. Value stocks tend to be found in the Energy, Financial Services, and Consumer Defensive sectors. The table above from StockRover* shows these three sectors outperforming the other eight. In addition, the Energy and Financial Services sectors are the only ones with positive YTD returns.

Source: StockRover*

Final Thoughts about the Tech Wreck

Interest rates are likely to rise further. The US Federal Reserve is tapering its bond-buying program. This action should be complete by March 2022. Subsequently, The Fed may raise interest rates, especially after considering the accelerating inflation rate. It rose to 7.5% in January 2022, a 40-year high. 

In all likelihood, the Fed will raise rates by at least 0.25% in March 2022. However, a more significant increase is possible. The CME Group’s FedWatch tool has a 100% chance of at least a 25-basis point target rate. However, the probability of a 50 to 75 basis point increase is 93.8%. The US Federal Reserve last conducted a 0.50% increase during the dot-com boom in 2000.

Source: Trading Economics