Will The Tech Stock Rout Continue?

It’s been a rough year for many technology-related stocks. Think Meta (Facebook), Netflix, PayPal, Block (Square), etc. And, although most of these household names aren’t even included in the “technology” sector, they are widely considered tech stocks. Meta and Netflix, for example, are in the communication services sector.

Honestly, I think the “technology” sector as it is defined, is losing some of its relevance. It’s getting harder to simply define a company as purely technology. But, I digress.

The first quarter of 2022 has been nothing short of a rout for many high-flying tech companies, and it’s left many wondering when it will end. Of course, no one knows the answer to that question. This could be a temporary blip or a trend that lasts for some time. Impossible to say.

What makes this especially hard is that these stocks have become staples of many investors’ (and funds’) portfolios. Meta – a very popular stock – for example, is down -36% just in the last 3 months.

But, to be fair, these go-go growth stocks have dominated the market for the better part of ten+ years, and their investors have been handsomely rewarded. This reversal of fortune was bound to happen. It’s nothing more than a rotational shift between sectors that occurs all the time (for various reasons) in the markets.

I do think it’s important to point out that one of the major factors contributing to the decline in “tech” stocks is the rise in interest rates. Many of these companies are in major growth mode and need extensive access to capital to facilitate their fast and furious pace. A rise in rates does not help them in this endeavor, and is a direct hit to their bottom line.

That being said, the technology sector, and related “tech” stocks in other sectors, are going to be fine. These companies are here to stay, and many will continue to dominate in the future. You’d be hard pressed to find many people who believe these tech titans won’t regain their stock market dominance in the future.

Now, does this mean they’ll experience the same pace of growth going forward? Maybe not. The tech industry is mature now, and the newness of the “dot.com” era is over. These companies are as common and familiar to the U.S. economy as Exxon or Procter & Gamble now.

But, they can still trade at extremely high multiples. And when the broad market crashes and everyone is suddenly risk averse, these high-priced growth stocks can be the hardest to fall. Value stocks, on the other hand, are already discounted, and don’t tend to experience the sharp selloffs we see in this type of risk-off environment.

It’s always been this way, and it always will be.

The next twenty years will surely usher in the new crop of innovative “tech” stocks that will dominate the stock market for decades to come. They’ll trade at absurd multiples and no one will care – and they’ll outperform in spite of this. Maybe they’ll come from up-and-coming industries like electric vehicles, 3D printing, or digital currencies. Who knows.

But, most assuredly, they’ll fly high for a while and then come crashing back down to earth. And the good ones, with enduring businesses and products, will be here for the long run.

Now, back to 2022. It’s not as if all other areas of the market, other than tech, are exactly crushing it this year. In fact, the energy sector is pretty much the only one doing well.

Notice the standout performer above?

It’s been the energy sector’s time to shine. Inflation is up, oil prices are up, and rates are up. Energy stocks had been left for dead, and many had pretty much underperformed everything on the planet for a very LONG TIME. Not anymore.

Since 2020, energy sector earnings have skyrocketed. An industry that had been discarded and forgotten is suddenly the hottest area of the market.

It just goes to show you – things can turn on a dime and without warning when it comes to investing. One minute you’re hot, and the next you’re not.

It’s best to invest in all sectors of the market and accept the inevitable in-and-out of favor fickleness of it all. You cannot time it.

If you’re holding some of these aforementioned high flying stocks (in small proportion within an otherwise diversified portfolio) that are in the dumps – don’t sweat it. They’ll have their day in the sun again.