Rapid rate hikes from central banks around the world wiped out tech stocks and cryptos in 2022.
During the corona crisis, growth stocks, just like digital currencies, found themselves in the Valhalla of the stock market. The quality stocks were in the ropes due to all kinds of lockdown measures, while tech companies benefited from working from home, the boost in e-commerce and the great coma viewing and gaming urge. Add to that the ultra-low interest rates and you have the perfect mix for tech stocks and cryptocurrencies (which investors often treat as a kind of tech stock).
But the tide turned radically this year. The massive gaming and coma viewing has made way for a loud urge, which means that consumers are looking for entertainment outside the door again. In addition, inflation was boosted by ongoing problems in supply chains in combination with strongly stimulated demand due to low interest rates and high government spending. The Russian invasion of Ukraine also caused the prices of energy and raw materials to rise sharply, giving inflation an additional boost.
Central bankers who previously thought the inflationary spike would be a temporary problem, suddenly turned their guns. Central bank presidents removed the word ‘temporary’ from their communications and decided to raise interest rates sharply to kill the inflation monster. The US central bank (Fed) in particular raised interest rates at breakneck speed. As a result, the ten-year interest rate in the US also rose this year from 1.5 to 4 percent.
Those very sharp climbs in long-term interest rates were a major problem for tech stocks. The higher interest rates lower the present value of future profits. And especially for technology companies, which still have a lot of growth to do, the valuation is mainly based on those profits in the future.
Higher interest rates are also making investors more impatient. In times of zero interest rates, there is little to earn from investing in bonds, so investors were more willing to invest their money in cash-guzzling companies. Now that even short-dated US government bonds offer solid returns, investors are much less eager to invest in loss-making tech companies.
Havoc in tech
So the combination of bad factors has wreaked havoc among growth stocks. As a result, the Nasdaq lost 30 percent of its value since the beginning of this year, making it a very bad year for the tech exchange.
In addition, it is not only the smaller loss-making tech companies that suffered a major blow to the stock market. Established names have also plunged lower since the beginning of this year. Apple
and Amazon lost dozens of percent. A veritable carnage was witnessed at Meta Platforms
which fell by up to 70 percent.
Cathie Wood, the publisher of the Ark Innovation ETF, also noticed the major turnaround in the tech sector. During the corona crisis, Wood was in the news all the time because her ETF packed with young tech stocks rose sharply in value. She was also a fan of bitcoin, which made her the face of the then successful tech investors. But the rampage in tech and crypto markets imploded the Ark Innovation ETF. This is how Wood transformed from investor guru to the bruise of the financial world.
During our discussion on Finance Avenue, we ask ourselves: what next with tech and crypto? We can expect an answer from crypto investors Levi Haegebaert, technology specialist Quirien Lemey of the Genevan asset manager DECALIA and Geert Smet of the weekly magazine De Belegger.
Not a great year for crypto
2022 was a very bad year for the crypto investor. In May, the stablecoin terraUSD imploded along with the underlying token luna. In November, the American crypto exchange FTX also collapsed due to the mismanagement of CEO Sam Bankman-Fried. As a result, the sentiment surrounding cryptocurrencies in general is under considerable pressure.
Combine that financial storm with the sharp rise in long-term interest rates and the misery is complete. The world’s largest digital currency, bitcoin, has lost more than 60 percent of its value since the beginning of this year, as has runner-up ethereum.