Tech investors that have been patiently waiting for a decent pullback have gotten more than they bargained for thus far in 2022.
With many of the former leaders in the sector facing heavy selling pressure to start the year and the tech-heavy NASDAQ index flirting momentarily with bear market territory, buying the dip hasn’t exactly been a winning strategy this year.
A lot of the weakness in these stocks has to do with interest rate increases and how they impact their valuations and future earnings.
To make matters worse, you have the geopolitical conflict in Ukraine, soaring commodity prices, and raging inflation which could weigh on corporate earnings going forward.
That’s why many investors are scratching their heads trying to figure out last week’s massive move higher, which saw the NASDAQ post its best week since November 2020 by rallying over 8% even after the Federal Reserve announced a quarter of a percentage point interest-rate increase and plans for six more hikes this year.
These types of rallies tend to mark the start of a bull run, and with April historically being one of the strongest months for the S&P 500 investors should at least entertain the idea that equities could be in for more upside ahead.
It’s tough to pinpoint exactly why tech stocks soared last week, but these are a few potential reasons why markets reacted the way they did after Fed day and why a tech rally could just be getting started.
The Fed is Finally Taking Action
Markets absolutely despise uncertainty, which is likely a big reason why we saw equities rally so sharply following the FOMC meeting last week.
After months of question marks surrounding what the Federal Reserve would do to combat the highest levels of inflation in decades, investors now have some much-needed clarity.
Keep in mind that fund managers and institutional investors need to prepare for every possible scenario, and it’s likely that they were anticipating a larger increase in the benchmark federal funds rate than what actually occurred.
With Fed officials finally delivering clear information about how they will use their tools to get inflation quickly under control, funds can adjust their models accordingly, which appears to imply adding more exposure to the beaten-down tech sector.
There’s also a good chance that even though interest rates are headed higher, investors are more comfortable with increasing their risk given now that Fed Chairman Jerome Powell is taking action versus playing an ambiguous “wait and see” approach.
Rate Increases Signal a Strong Economy
Another possible reason why tech stocks soared last week is the idea that tightening monetary policy is a signal that the Federal Reserve believes the U.S. economy is in a good place.
Reducing the monetary supply and raising interest rates could be a disaster if it leads to a recession, but it’s clear that Jerome Powell feels confident in the economy’s ability to handle these dramatic moves.
Powell mentioned in his press conference that “The American economy is very strong and well-positioned to handle tighter monetary policy,” which is certainly encouraging.
Perhaps investors viewed the news last week as a vote of confidence from the Fed that the economy is heading in the right direction, which led to a huge move higher in the tech sector.
Bad News Was Already Priced In
The market is known to be a forward-looking mechanism, and there’s a good chance a lot of the bad news and risk factors had already been priced in at the start of this multi-day rally.
Markets have faced heavy selling pressure for months now, particularly in the technology sector, and equities have been long overdue for a bounce.
When market sentiment gets extremely bearish and the majority of market participants are leaning to the downside, it creates the perfect environment for a rally.
Keep in mind that last week’s quadruple witching, which refers to a date on which stock index futures, stock index options, stock options, and single stock futures all expire concurrently, could have also been a factor in the sharp bounce higher.
According to Goldman Sachs, about $3.5 trillion of single-stock and index-level options expired on Friday, which is a truly staggering figure.
Many large investors were likely hedged against market downside given all of the complicated factors we have been dealing with, and as those short positions were covered it likely increased the size of the up move.
What’s Next for Tech Stocks?
There could absolutely be more volatility ahead for equity markets and tech stocks this year, and as long as indices like the NASDAQ and S&P 500 remain below their all-important 200-day moving averages, investors should still be cautious about adding exposure.
On the other hand, last week’s price action truly felt like a change of character in markets that should not go unnoticed.
Tech stocks have plenty of room to continue higher and adding exposure to the strongest names in the sector like Amazon (AMZN) – Get Amazon.com, Inc. Report, NVIDIA (NVDA) – Get NVIDIA Corporation Report, and Tesla (TSLA) – Get Tesla Inc Report might end up being a smart call for long-term buyers.
These companies all displayed relative strength and heavy accumulation last week during the rally, which suggests that institutional investors are increasing their exposure in riskier areas of the market for the first time in months.
For now, it might make the most sense to take a cautiously optimistic approach towards increasing tech exposure until the market proves that this new uptrend is for real.
After all, if this move is indeed the start of a new bull run, the rally in tech stocks is likely just getting started.
