Stocks are down. Is it really over for Tech stocks?

In 2022, stocks have turned south. Let's talk about what's driving the rotation into value. Is the tech dominance done? What about Cathie Wood stocks?

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SCRIPT
2022 has been noisy so far. If you are invested in stocks, chances are you losing money for the year. I know I am. Ever since the Fed changed their tone and when transitory became persistent, It’s brought back volatility and uncertainty. The narrative is that the economy is too hot, inflation is out of control, fed needs to taper and raise interest rates, maybe 3-4 times. Dump hyper growth stocks and focus on value. This shift in tone and economic conditions has led to chaos, uncertainty and a massive rotation from certain sectors of the stock market into other sectors. How do you make sense as an investor given everything that is going on.
To me you need to understand three things - the role of Fed, The Wall Street playbook and how it impacts stocks. Our buddies at the Fed have reasons to exist. They manage the currency, economic growth, unemployment and inflation. When economy is in trouble you will hear Fed printing new money and lowering interest rates. Not printing money in literal sense but is issuing credit to banks
On the flip side, which we are in now, if the economy gets too hot, Fed will start increasing interest rates.
Wall Street has a playbook. Whether we like it or not, most portfolio managers will follow this playbook. You might have heard this phrase, don’t fight the fed. To some extent, same applies to the playbook. Don’t fight the playbook. It dictates how to position a portfolio given the market conditions. Company news, macro economic news like interest rates, inflation, economic growth and unemployment, influence the playbook
A typical, portfolio manager will open the playbook and start making moves.
Here are some strategies.
Trim Growth. Especially, unprofitable companies. Most tech companies enjoy a premium share price today based on the potential of future profits. Rising rates mean future profits are worth less today.
Buy Value - Rates and yields are rising because investors believe economy is doing good. Business and consumers are in much better shape. This means companies and earnings should do fine due to boom in economic actives. Instead of paying for high valuation and innovative companies, invest in low beta names since they will do good which will be reflected in higher earnings and higher stock prices.
Banks can increase the rates they charge for loans and their margin improve. We have already seen banks outperform in 2022. Buy reopening names - Economy is doing good, recovery is strong. That means names that once got destroyed is where the opportunity is - Airlines, restaurants, casinos, and hotels. Other sectors that do well in an inflationary environment are real estate and energy.
The point I am trying to make here is, the playbook is defined. Most managers follow this playbook which is driving what we are seeing in the stock market
Let’s talk about tech a little bit more. Most tech companies rely on future cash flows. Meaning they are probably making a loss today but are expected to make exponential profits 3-5 years from now. As a result, growth stocks that have high expectations for earning in future will be hit harder. Call it math, economics, time value of money or discounted cash flow. This means that when rates go up, trim growth and go all in on value. Right.
This relationship between rates and growth stocks is not as simple as it sounds. In the last few months, the negative correlation between the Nasdaq 100 and 10 year treasury yield is strong, meaning when yields go up, tech falls. But it’s a different story when you zoom out a bit, the correlation is all over the place, moving viciously between positive and negative. There is no noticeable relationship whatsoever
What does this means for us? In a high inflation and rising interest rate environment, valuation is back in vogue. In the short term, we will see hyper growth stocks get destroyed since they were frothy to start. You will be better off sticking with traditional quality mega cap tech. In the long term, the correlation between rising rates and growth stocks is all over the place. While they want you to believe that value is going to rule the next decade, no one really knows. For these reasons, I am sticking with a balanced portfolio.

DISCLAIMER - I am not a Financial Adviser or Tax Professional, the information provided is my personal opinion and should not be considered professional advice.
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