Long-term Impact of Tech Stocks on Markets
Updated: Dec 16, 2022
We are currently witnessing a tech bear market, and many investors are comparing it to the 2008 Dot-Com crash. Nasdaq and S&P 500 have witnessed corrections upwards of 20 percent from the start of the year.
The first three months of 2022 have only brought volatility for tech stocks, forewarning more downs than ups to come. Stocks of Meta, Google, and Netflix underwent serious dips, accentuating panic and uncertainty in the market.
Frenzied investors are going for large sell-offs as the trust in tech dwindles, creating a feedback spiral of more sell-offs and further devaluation of stocks. These reasons intertwine and compound each other to create the circumstances responsible for the tech crash.
Let's examine the main reasons for the recent dive in tech stock prices:
Reason for Stock Price Plunge
1. Rising Interest Rates and High Inflation
The inflation rate is at an all-time high across the world. Banks are increasing interest rates to counterbalance inflation. As a result, it has slowed down the economy and reduced the purchasing power of the population.
Reluctance to invest in stocks is rising as household and commodity prices soar. The tech companies that thrived on cheap interest rates find it harder to sustain growth and support expansion.
2. Post-Pandemic Drop in Growth
Throughout the pandemic, tech companies grew manifolds in revenue, boosted by the shift from offline to online. Companies like Zoom, Discord, and Netflix that facilitated remote work and entertainment became big players in their market.
As the revenue snowballed, investors pooled more capital in these companies in the hope of greater returns. And great returns they did get. But the pandemic wasn’t going to last forever. As physical restrictions loosened, the ‘tech bubble’ crumbled, sending the prices on a nosedive.
3. Herd Mentality and Panic Selling
Panic selling is a common human tendency seen in tough times of the bear market. Hobbyist investors feel selling pressure observing the sell-offs from peer investors in fear of inadequate market knowledge and experience. It catalyzes a chain reaction that feeds on mass paranoia and impulsive decisions without having any substance in facts.
These gut-driven sell-offs further depreciate the stock’s value. Therefore, the perceived value of the shares goes down among the investors, which makes even more inventors anxious.
4. Rise and Fall of Retail Investors
A new wave of hobbyist and retail investors flooded the stock market in the pandemic fueled by the arrival of user-friendly investing apps. People with more time in their hands found access and interest in stock trading through the ease of their phone screens.
But as this workforce was called back to the office, fewer people had time to keep up with the stock trading world, and the number of retail investors slowly diminished. Consequently, burdening the already volatile market.
5. Overvalued Stock Prices
Tech companies underwent tremendous growth during the pandemic, aided by physical restrictions and the acceptance of remote work culture. Valuations and market cap increased manifolds camouflaging tech stocks as a vehicle for high-growth and quick money.
Huge capital was pumped in by both seasoned and retail investors in anticipation of high returns, pushing company valuation through the roof. Backed by funds and to manage rising customers, IT companies participated in vigorous hiring, and the tech packages went from criminal to ludicrous.
These unsustainable developments had to come crashing down sooner or later, and the end of the pandemic along with the ongoing war orchestrated the domino effect that we are observing now.
6. Russia Ukraine War and Macroeconomics Trends
The undulating tides of the Ukraine-Russia war have produced second and third-order effects that surpass the immediate price hike of wheat and oil. Netflix lost 7,00,000 subscribers after it withdrew from Russia in protest of its invasion of Ukraine. Many companies across different sectors have followed suit in solidarity with Ukraine.
The rise in the prices of essential goods and energy has shrunk investors' risk appetite worldwide. People are moving from tech stocks to the safer shores of gold and bonds that have reliable although lesser returns.
Even though tech stocks have been hit hard, there is hope in the longer future for reasons that still make them attractive. Let's see:
Why Tech Stocks Still Show Promise
1. Market Disruption through Rapid Innovation
Tech has always been the trailblazer with cutting-edge and state-of-the-art innovation. The world around us abounds with technology from video-calling apps, UPI payments, AI-driven assistants, and much more.
The future of tech only holds sweet promise with services transitioning to the cloud and the prevalent usage of machine learning together with data mining.
2. Big Tech companies have multiple revenue sources and rich cash flow.
Companies like Google and Meta have their revenue sources distributed across multiple sectors, providing a broader market hold. It also makes the company immune from market crashes and volatility, as the loss in one sector can be compensated for by another.
Freedom from volatility enables these companies to take even more risks to create novel products that will steer technology ahead and monopolize specific niches.
With these two primary rationales in place, it is advised to step forward in the market, keeping a long-term perspective in mind.
How to Navigate in the Dip
The key is to think long-term and hold onto the tech stocks for attractive returns. The curve is on its downward slope now, but the rising draft will return. The volatile market is going through a rebalancing phase, and as the turbulence settles, the tech stocks shall soar.
It would be unwise to give in to emotional trading that propagates mass sell-offs and only stretches the downward trend. Better to sit back and ride the low.
It could even be an opportunity to buy tech giants' stocks that are usually traded at exorbital prices. The rock bottom of this crash is unclear, but that should not deter you from leveraging it to your benefit.
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Reference
https://time.com/6175464/why-tech-stocks-are-down/