How to make money from the tech stock liquidation of 2022?
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Tech stocks around the world experienced the biggest crash in early 2022 after an accelerated rise in 2020 and 2021. Hedge funds dumped their high-value tech stocks between Dec. 30, 2021 and Jan. 4, 2022. more than a decade, according to Goldman Sachs‘ data reported by CNBC. the Nasdaq Composite Index fell 8.9%, and the iShares S&P/TSX Capped Information Technology Index ETF (TSX:XIT) 15.3% since December 30, 2021.
When hedge funds enter the scene, investors who have burned their hands in meme stocks look at the short-term interest of the stock. But hedge funds are selling their long positions in tech stocks, and there is no profit in short selling as seen in the last two months of 2021. Why are hedge funds selling? Are they leaving a sinking ship or have they found an opportunity elsewhere?
What is driving the 2022 tech stock sell-off?
Goldman thinks Fed interest rates are driving the sell-off in tech stocks. The US Federal Reserve has hinted that it may raise interest rates and reduce bond purchases in 2022. When interest rates rise, borrowing becomes expensive, impacting businesses and consumers.
Add to that rising inflation and consumers have less money to spend. A slowdown in consumer spending could reduce revenues for e-commerce companies and other consumer goods. An increase in borrowing costs could impact earnings for leveraged companies. The stock market tends to react immediately to changes in interest rates as it assesses future growth.
The near-zero interest rate and fiscal stimulus funds have brought liquidity to the economy that has inflated stock prices over the past two years. Investors preferred to invest in the stock market rather than the bond market. Tech stocks have attracted investors due to their high earnings growth rate and promising outlook. Investors expect 10 years of growth to Shopify (TSX:SHOP)(NYSE:SHOP). Consequently, hedge funds acted quickly and took profits on the news of rising interest rates.
This inverse relationship between interest rates and the stock market has caused the technology to sell off. Many value investors feared a 2001-like dot-com bubble as tech stocks hit 2001 levels. In the late 1990s, investors poured money into anything tech-related. Suddenly they pulled out of the market in 2001 when the business was not viable. But the 2022 sell-off is a consequence of monetary policy tightening, which means hedge funds aren’t leaving a sinking ship.
How to Make Money Selling 2022 Tech Stocks
Now, every major market momentum presents risk and opportunity. It depends on how you play the swing. You can reduce risk and increase returns through portfolio diversification and smart asset allocation. In investing, one person’s loss is another’s profit as money changes hands. You have to see where the money is going and do the same.
Financial stocks tend to benefit from rising interest rates, as they can charge higher interest for loans. Commodity and energy stocks tend to benefit from rising inflation as they can fetch higher prices for their output.
Royal Bank of Canada and Suncor Energy could thrive in an economy with high inflation and high interest rates. They will also benefit from economic growth. The two stocks have jumped 13% and 19% respectively since Dec. 20, 2021. Now, these stocks won’t exactly make you rich, but they could balance out your portfolio returns when high-growth tech stocks fall.
Should I buy the dip?
The question is, should you buy the 2022 Tech Dive? Tech stocks fall due to changes in interest rates. Their fundamentals are still solid. The wave of e-commerce, digitization, cloud services and 5G are long-term trends that are changing the way you live and work. They might see a short-term downturn, but their long-term growth potential is intact.
If you’re unsure which tech stock to buy, the XIT ETF is a good way to gain full exposure to the overall growth of the tech sector. Another good stock is Shopify because it leads the wave of e-commerce. You can also check out my previous article where I mentioned some tech stocks that are worth buying on the downside.