2022 was a bad year for tech stocks. A really bad year. Popular stocks like Tesla were down 69% in December, all whilst the Nasdaq returned an eye-watering -33.47% across the year.
Tech was the worst-performing industry by far, although retail consumption is also on the decline. Amazon shed half its value, whilst Nvidia and Microsoft also got crushed.
As a result, many people turned to Futures trading in oil, gas, grains, and commodities. These provided some gains in an otherwise bleak year for stocks. Terms and Symbols in Futures Trading can be found to help beginner investors get to grips with the growth of futures trading.
Why did tech stocks fall out of favor?
One of the main reasons that tech stocks fell out of favor in 2022 was because of the tremendous couple of years they had leading up to it. Throughout the pandemic, and in spite of lockdown-inducing consumption and productivity decline, stocks did very well. This was in part down to stimulus checks being in the hands of new-found retail investors who had a sudden appetite for investing. And, not just investing, but risk.
Of course, retail investing-backed stocks that are high-risk will inevitably be volatile. This volatility is being realized as we speak, which is one argument in favor of there being a bounceback in 2023.
The other reason for their fall is that their glory years of late were in part backed by near-zero interest rates. Cheap money makes investors more risk-hungry. The reason is that money is cheap and there’s little reward to saving, meaning almost any return on their investment is better than it is in a bank.
Of course, this soon changed in 2022. A European war and supply shocks led to high levels of inflation that could only be dealt with by a rise in interest rates. Very quickly, safe debt products became more lucrative, making high-risk assets like tech less appealing.
Another reason for their decline is because, arguably, it was a well-needed price correction. Valuations have been ballooning and they were becoming increasingly difficult to justify. Evidence of this can be shown by the fact that the FTSE 100, full more of banks and energy firms than tech, faired a lot better recently. They were never overvalued to the same extent, therefore no price correction occurred.
2023 predictions for tech stock
Does that mean that tech stocks are now correctly priced and so we will only see modest gains in 2023? Hardly. Things are expected to go back to usual.
Whilst there are some recession fears, that never stood in the way of tech stocks performing well. In 2020, there was a literal nationwide lockdown that was a far worse economic situation than today. Yet, besides the Black Monday crash, tech thrived.
Kicking off 2023 we have already seen mass redundancies - generally news that is positive for investors. Zoom recently 10% in price in a matter of hours following the news that they are laying off 15% of their workforce, which is around 1,300 employees. Profitability has been an issue for many of them, and redundancies tend to help with that.
Furthermore, technical analysis traders among panic sellers mean that momentum is a thing. But, there is usually a turning point, and most analysts would be very surprised if 2023 wasn’t it. Being down almost half their valuation, they have likely hit their price floor. If not now, then soon.
History also tells us that the S&P 500 - which is heavily weighted towards just a handful of tech firms - does particularly poor in midterm election years, of which 2022 was one. 5.9% is the average annual price return in such a year, whilst all non-election years see a 12.1% average return.
Finally, part of the optimism is because we have already seen a shift in the start of the year. Wall Street has already piled into tech in the past couple of weeks, which saw large increases in Meta Platforms and a Nasdaq rally.
Of course, not everyone is this optimistic. Bloomberg recently covered a story on why tech is no longer synonymous with growth, which is in part highlighting that many ‘tech’ firms aren’t tech firms at all. Netflix is a media company, whilst Tesla is a car company. Meanwhile, Sam Altman who is head of OpenAI recently claimed that AGI can “break” capitalism. And, although likely hyperbolic, we could see some companies come under threat from AI developments in 2023. One example is Google, which are profoundly threatened by the latest ChatGPT developments which saw a drop in SEO efforts recently.
Tech will likely rebound, but picking out the winners in 2023 is difficult. Nasdaq will likely soar according to the majority of analysts, but volatility will inevitably remain. However, whether we will see them end the year as strongly as previous years is in doubt, particularly with the potential shift towards value and index investing.
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