Potential Tech Reversal Pushed Back
Tech investors want nothing to do with an aggressive Federal Reserve, but that’s what we have.
I don’t choose this and neither do many others out there.
We have been spoilt in a world with low inflation, global peace, low energy, and high liquidity which was the perfect scenario for tech stocks.
The reverse has happened almost overnight and now it’s that much harder to earn your crust of bread in the tech world.
Gone are the days of buying Facebook for peanuts then going for a sauna and a nap. It’s not that easy right now.
Tech stocks don’t go up in a straight line anymore – there will be many zigs and zags along the way moving forward.
Tech stocks aren’t immune to these exogenous stocks and as anointed growth companies, they inherently need to borrow capital and grow more than the cost of it.
That endeavor is stretched to the limit as bond yield explodes to the upside with this latest rate rise.
Raising interest rates by 0.75% for the third consecutive time this afternoon was the consensus, but in fact, there was a 25% chance of a full 1% rate rise. We avoided that bullet.
Tech stock doves were hoping US Federal Reserve Governor Jerome Powell would save them, by initiating a pivot to save the stock market, but no do this time around.
It underscores that Powell is adamant about continuing this inflation battle even if I do believe it’s too little too late.
The central bank’s new benchmark borrowing rate is now between 3.0% to 3.25%, up from the current range of 2.25% to 2.5%. This would bring the fed funds rate to its highest level since 2008.
Tech stock reacts most sensitively to the change in Fed Funds rates which is why we have seen CEO and Founder of Meta (META) or Facebook Mark Zuckerberg lose $71 billion of his net wealth this year.
Not only is the macroenvironment squarely against him, but his flagship product Facebook is losing steam, and his new product the Metaverse has garnered tepid reviews from outsiders.
How long does the Fed intend to increase rates?
The updated consensus for the Fed Funds Rate shows it at 4-4.25% by the end of 2022, another hike to 4.25-4.5% at end of 2023, and one more cut in 2024 and two more in 2025.
The answer is quite a while longer.
In the meantime, this will initiate a “reverse wealth effect” and tech stocks are the biggest losers, and the US dollar is an unmitigated winner.
Delaying lower Fed Funds rates means delaying the reversal in tech stocks which need lower rates to explode higher and without it, they are quite ordinary.
Signaling higher rates for longer is designed to tame inflation, but there are so many unintended consequences for US tech stocks.
The most important themes to be concerned about are revenue and financing.
The .75% increase in rates will mean that tech stocks will produce lower annual revenue because financing costs will be higher.
This is already at a time when general costs have exploded higher such as an uncontrollable wage spiral, supply chain bottlenecks, health care costs, transportation costs, and energy costs.
It’s a great deal harder to keep the numbers down enough to profit which basically means gross margins will compress further from today.
Tech stocks will come back because they always do. They are the profit engine of corporate America, and that will never change.
I see great tech companies like Apple (AAPL) installing the framework so they can maximize on the next move up when the bull market reignites.
They are doing this by moving iPhone production to India and other tablet production to Vietnam to get out of lockdown China.
Now is the time to reset before tech bounces back and it’s painful to see tech get slaughtered, but this is a necessary evil after a wonderful bull run from 2012 to November 2021.
US FED GOVERNOR GIVES NO LOVE TO TECH STOCKS
