The two superstar investment sectors of the past decade are US tech stocks and cryptocurrencies, but both are off to a miserable start to 2022.
Tech trillionaires Apple, Amazon, Microsoft, Tesla and Google-owner Alphabet, and cryptocurrency leaders Bitcoin and Ethereum have been losing investors’ money recently, rather than gaining more.
So is this just a blip or are the glory days gone for good?
Both have had a blistering 2021. The US S&P 500 returned 28.7% overall, with Microsoft, Apple, Nvidia, Alphabet and Tesla delivering a third.
Bitcoin rose 48% from $32,149 in early January to close the year at $47,733, while Ethereum nearly quadrupled to $3,767.
However, this year has been too difficult.
On January 3, Apple became the first company in history to be valued at $3 trillion, but has since slipped to “just” $2.71 billion, a drop of 9.66%.
Microsoft fell 9.3% over the same period, with Amazon down 8.3%, Alphabet down 7.1% and the still-volatile Tesla plummeting 17%.
At the time of writing, Bitcoin was trading at $42,103 and Ethereum at $3,143, declines of 11.7% and 16.5% since the start of the year, respectively.
Tech stocks and cryptocurrencies tend to do well when investors are feeling bullish and buzzy, and are happy to take on a little more risk in hopes of generating outsized returns. When markets turn bearish, the reverse happens.
Investors have gone into “risk-free mode” as the Omicron variant and the spread of inflation, and these two once endemic sectors feel the impact.
US investor sentiment deteriorated in the final days of 2021 even as markets hit all-time highs, said Olivier d’Assier, head of applied research for Asia-Pacific at financial intelligence firm Qontigo. .
“This negative sentiment is likely to limit short-term market advances and should continue to reward risky strategies more than risky ones,” he said.
This favors low-risk, low-volatility “value” sectors such as consumer staples, energy, financials and utilities.
Inflation in the United States has reached 7%, the highest rate since 1982, and investors fear that the United States Federal Reserve and other central banks will now be forced to raise interest rates aggressively, with “Potentially very negative consequences for the markets,” Mr. d’Assier said. .
The market has a “strong sense of apprehension”, he adds.
“2020 has been the year of the bulls. 2021 the year of the doubters. Current sentiment seems to be betting that 2022 will be the year of the bears.
Rather than trying to turn a little money into a lot, investors want to avoid a lot of money turning into a little, d’Assier concludes.
Markets face fresh selling pressure while avoiding a full-scale correction, said Chris Beauchamp, chief market analyst at online trading platform IG.
The U.S. earnings season has “started with a groan,” with investors looking for negatives even in positive corporate reports. “JP Morgan’s record annual earnings have done little to improve the mood, which remains firmly risk-free,” Beauchamp said.
It didn’t help that JP Morgan predicted six or seven US base rate hikes this year, which will make equities less attractive as yields on lower-risk alternatives such as bonds rise.
“Investors continue to sell strongly, indicating a new negative atmosphere,” adds Mr. Beauchamp.
It’s not all bad news, as M&A activity remains buoyant, says Fawad Razaqzada, market analyst at Think Markets.
“It hit a record high of over $5 billion in 2021 and Microsoft’s decision to buy Call of Duty maker Activision Blizzard for $68.7 billion suggests it will continue,” he says.
Tech stocks are expensive after years of runaway success, says Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown. “This makes them vulnerable as interest rates rise because it reduces the value of their future earnings.”
Technology-focused investment funds such as London-listed Scottish Mortgage Investment Trust, which at one point grew 500% in five years, are also feeling the heat.
“It contains a host of tech darlings such as Tesla, Amazon and Chinese smart electric car company Nio, and is among the biggest droppers amid concerns that the tech juggernaut is on a rocky road,” said Mrs Streeter.
Bitcoin and Ethereum have been caught up in bearish investor sentiment and are falling in line with Nasdaq-listed tech stocks, said Vijay Valecha, chief investment officer at Century Financial in Dubai.
“Their statistical correlation has reached astonishing levels since the Fed started beating the drums of higher interest rates and shrinking the balance sheet,” he adds.
In the two months to January 18, the Nasdaq Composite’s statistical correlation with Bitcoin and Ethereum stood at 83% and 70%, respectively.
“Without a strong rally in US tech stocks, cryptocurrencies will hold no gains. Technically, both seem extremely weak,” says Valecha.
Bitcoin is now consolidating in a tight range between $41,000 and $44,000, said Sam Kopelman, head of global cryptocurrency exchange Luno.
“Winter has been bleak for crypto holders as the market has remained fearful for over two months now. This forces investors to scramble for cash and safety,” he adds.
They are also rushing to safe-haven gold, which has climbed nearly 1.67% to $1,834 an ounce over the past month, according to Goldprice.org.
More growth could come in a respite for gold bugs, which saw the price drop slightly last year, Beauchamp says. “While higher bond yields should normally put pressure on gold, global inflation should give gold a longer-term boost.”
Others are turning to companies with pricing power to escape “inflation hell”, said Paul Allison, head of equity research at Freetrade.
“Pricing power is a rare and very valuable thing. This allows companies to pass on rising input costs to consumers and maintain profit margins,” adds Allison.
He picks two consumer stocks that have this rare ability, Coca-Cola and French luxury brand LVMH. “They value customer loyalty, which can mean they can raise prices without a significant drop in demand.”
Companies that sell essentials such as food, medicine, energy and even insurance enjoy the greatest pricing power because people need their products, said Darius McDermott, chief executive of FundCalibre. .
“European companies Nestlé and semiconductor company ASML, US consumer goods giant Procter & Gamble and UK-listed information services companies Wolters Kluwer and analytics specialist RELX all have a pricing power,” according to McDermott.
The current gloom should not be overstated and the outlook for global gross domestic product growth remains promising. PwC’s latest Global Economy Watch predicts 4.5% growth in 2022, above its long-term rate, coupled with a jobs boom.
The anti-tech shift may be overstated because many private investors see Apple and Amazon as defensive stocks, said Ben Laidler, global markets strategist at eToro.
“They use their products every day and expect that to continue even if the global economy is struggling,” adds Laidler.
Nothing lasts eternally. Tech stocks and cryptocurrencies are the best performing investments of the past decade and at some point the market had to turn around.
However, bargain hunters may see this as an opportunity to buy rather than sell. Just keep an eye out for the threat of inflation.
Updated: January 25, 2022, 5:00 a.m.