Why are the Tech stocks falling?
The financial markets are in turmoil again but it is only living up to its reputation as a volatile entity.
People who remember the tech bubble of the 1997-2000 period, they will not be surprised by the tumbling tech stocks. For others, the crashing of the technology stocks which have been the best performing sector of the global market has come as a shock. The market itself is on its way down and the tech stocks are bearing the brunt of it. There are many reasons for the markets crashing, the main ones are - Fed’s rate hikes, Russia’s war on Ukraine, rising inflation and lockdowns in China which are affecting the global supply chains and high valuations in the stock-market itself.
Interest Rates on the Rise – Interest rates are only 1% in US right now and are expected to go up further as inflation remains high. As the monetary tightening will continue, money will move away from risky assets and into least risky assets like treasuries.
US Inflation Rate – US inflation rate is at 8.54% which is a forty year high for the country. Last time the inflation was so high, the Fed had moved the interest rates to double digits. The inflation is causing people to start cutting back on spending. Companies like Netflix and Shopify are losing subscribers and thus hurting their earnings.
Covid Uncertainty – No one knows if we'll have another deadly wave of covid or it may remain mild and under control. There are lockdowns in China which are adversely affecting the supply of raw materials and finished goods.
Russia’s war on Ukraine – As the war drags on in Europe and nuclear attack remains a probability, there is very high uncertainty. Fuel prices are rising, companies are closing their businesses in Russia and investors are looking for safety.
High Valuations – The stock market recovered quite quickly from the covid crash of March 2020. The central banks were pumping money into the market and interest rates were kept artificially down for a long time. The easy-money party has ended now and the assets prices across the board are coming back to the ground.
How does this affect us in India?
The stock market is going down as FIIs are pulling money out of the market.
As the war goes on, the oil and gas prices will remain high.
If US goes into recession, it will affect the global economy.
What should an investor do at this time?
Make your shopping list – Even before the market starts to decline, we should create a list of companies we would like to buy when their prices become more reasonable.
Buy in tranches – No one knows how much the market will fall or how quickly it will rise. Instead of trying to find the bottom, deploy your cash over time in a few tranches.
Don’t sell your stocks – If you are a long-term investor, you need to understand that financial markets are inherently volatile. Corrections and bears markets are a part of the investor’s journey.
What if the market keeps falling?
The average bear market drawdown is around 25%, and it takes around 15 months to recover from the market lows. The best way for a long-term investor is to keep investing through the decline in small amounts (dollar cost averaging).
“You make most of your money in a bear market, you just don’t realize it at the time.” - Shelby Cullom Davis