A thought about the coming year in the stock markets

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Hello everyone, after a short break I start again with my posts. This short break allowed me to deepen several topics, first of all the one related to cryptocurrencies. Right now we are in an uncertain short-term scenario and therefore I preferred not to publish anything. As for the stock market, one of the big unknowns is the collapse of equities, especially technology stocks, following the possible new tighter monetary policy by the FED. But let's go in order.

The Fed opens up to an interest rate increase "sooner and faster" than expected. The prospect of a tightening scares the stock exchanges.

The strengthening of the economy and the inflation could translate into an increase in interest rates sooner and faster than expected. The Fed anticipates this in the minutes of the meeting of December 14 and 15, suggesting that there is the possibility of a tightening sooner than expected. The "hawkish" turnaround immediately froze the U.S. stock exchanges, followed closely by the European ones that on Thursday morning opened in the red, interrupting the rally of the beginning of the year. "The outlook for the economy, the labor market and inflation could justify a rate increase sooner and faster than anticipated," reads the minutes. Uncertainty remains high, however, due in part to the emergence of the Omicron variant. Many members of the Fed's operating arm, however, noted that they "do not yet see the new variant as a fundamental alteration in the path of economic recovery in the United States."
The central bank's minutes hint at the possibility of a more aggressive than expected tightening, followed "shortly thereafter" by the start of the Fed's balance sheet reduction. Some members "judge that less accommodative policy may be warranted" and that the Fed should make a "strong" commitment to addressing and combating "elevated inflationary pressures." While anticipating a "significant decline" in prices in 2022 as tensions in supply chains diminish, "nearly all components revised their inflation estimates upward for this year and many for 2023 as well," the Fed minutes specify.
Commenting on what emerged from the minutes, Bloomberg economist Yelene Shulyatyeba noted that "the FOMC members' words on the labor market suggest that, in their view, the economy is very close to or has already reached maximum employment." As a result, "it is possible that the economy has hit the full employment target early, in the face of a smaller labor force than previously anticipated, meaning that there is a need for tighter policy sooner than anticipated."
But are we sure the link between Federal Reserve rate hikes and plummeting tech stocks is inextricable?

LINK TO BE ASSESSED
This connection is not so obvious! Proof of this is the data from the last two major rate hike cycles by the U.S. central bank ranging from mid-2004 to September 2006, when the Fed raised rates from 1% to 5.25%, and the period between December 2015 and April 2019, when the Fed raised rates from 0 to 2.5%.

NASDAQ ON THE RISE

Theoretically, in these two phases, the Nasdaq Composite should have lost ground. Instead, in the first period, it gained 11% and in the second it put in a performance of an impressive 57%.
The main differences concerning the past are the yields on T-Bonds, which are much higher than today, with the ten-year bond traveling above 1.7%: in practice, there is no alternative to equities, obviously on condition that investments are properly diversified.

Many look with some apprehension, if not something more, at the graph of the Nasdaq, the index symbol of global tech that in the first 5 sessions of 2022 has left a thousand points on the ground. In the end, we are talking about a little more than 6% but half of the slide was concentrated in the last two days of the first week.

A crash coming for the big tech stocks that have reached the end of their run? Or a healthy correction from the excesses that opens entry windows to buy on balance?

Both would seem to be the wrong questions and thus doomed to lack a useful answer. Talking about tech stocks today is not the same as it was 22 years ago to talk about the new economy and internet stocks. At that time it was a vanguard in unexplored territory, in a world that all things considered still worked mainly with the old economy. Today, digital technology is the backbone of the entire global economy. The cloud is used in agriculture, transoceanic freight transport, oil & gas, the manufacturing industry, starting with the automotive sector, construction and infrastructure, through to credit and finance. To hypothesize the crash of tech is to imagine the end of the world.

THERE IS EVERYTHING INSIDE TECH

This is not the case! It is necessary to look deep inside the indices, and not only at the Nasdaq because even in the S&P 500 the tech component now accounts for at least two-thirds. And inside you can find everything. Like Enphase Energy, which has fallen 21% since the beginning of the year and is now 44% away from the highs of only a couple of months ago, after a breathtaking run, but continues to trade at stellar multiples. Meanwhile, is Enphase tech or energy, a sector advanced by nearly 50% by 2021? It applies technology to solar generation and energy storage. Or Nvidia, which has entered Bear territory, given that the distance from the highs exceeds, albeit by a little over 20%, but it too has just come back from a wild ride that led it to increase its share value tenfold in three years, with a monstrous acceleration between mid-2020 and early December, when the correction began. To speak of Bear for a stock that continues to be worth three times what it was worth 18 months ago seems like a joke.

MARKETS AND ECONOMIES IN THE MIDDLE

If this isn't March 2000, then where are we? Probably in the middle of an epochal ford. Markets and economies have decided to definitively leave behind the land of the old economy after a couple of centuries, but they haven't yet pitched their tents on the other side, that of digital, 5G, artificial intelligence, automation, cloud, etc. There is a strong current in the ford, made up of opposing forces that have instead been the same for millennia. On the one hand, there is the desire to pocket at least part of the stellar gains made so far only on the Wall Street board, and on the other hand, the temptation to go and collect at prices that look like a sale what in a few years or months could be worth three or four times more. In this game, which could last well into 2022, stock market indexes may ultimately be zero-sum, but underneath the movements can also be powerful.

LABELS NO LONGER SAY ANYTHING

The latecomers are the ones who fare the worst because they have to decide whether to accept the loss after entering recent highs, or hold on and wait for the night to pass. In the meantime, what has already started to happen for ESG investment strategies, i.e. environment, social and governance, is happening in the market. Until not so long ago, the label was enough to entice investors, now more and more are wanting to look into it, sector by sector and company by company. The same is happening and will have to happen for the stock market in general. The label "Tech" now means little or nothing, in a world where Amazon is the new global Walmart, Microsoft the new IBM and Tesla the new General Motor or perhaps the new General Electric. In Europe it is different, tech is everywhere but it travels under the surface, there are no global champions to buy on the lows or sell on the highs.

WHICH TECH STOCKS HAVE LOST THE MOST GROUND: BUYING OPPORTUNITIES?

Buy what? A measure can be represented precisely by the size of the 'discount' offered compared to the highs of the last year, and in this case, the favorite stock should be Twitter, which leads the ranking of the worst with a loss of more than half the value. But others prefer instead those who have lost less but could restart earlier. In this case, the names that are circling are Apple, only 4% below the highs, and Microsoft, down 10%.

THE COMPLETE LIST OF FALLEN STOCKS

The list of the worst performers, consisting of 25 stocks that have left between 20% and 50% off their highs for the year, offers a wide range of choices, from Twitter to Nvidia, Take-Two Interactive Software, and Fleetcor Technologies, all three of which are down 20% from their 52-week highs. Here's the full list below in descending order of declines:

#NAMETICKERMAX 52 WTodayVar.
1TwitterTWTR80,7538,71-52,06%
2Enphase   EnergyENPH282,46142,13-49,68%
3EtsyETSY307,5174,54-43,24%
4PayPalPYPL310,16183,5-40,84%
5Activision BlizzardATVI104,5363,6-39,16%
6IPG PhotonicsIPGP262,55161,02-38,67%
7Paycom SoftwarePAYC558,97351,25-37,16%
8SolarEdge TechnologiesSEDG389,71247,74-36,43%
9Citrix SystemsCTXS145,1995,32-34,35%
10Global PaymentsGPN220,81147,13-33,37%
11Take-Two Interactive SoftwareTTWO214,91143,53-33,21%
12Ceridian HCM HoldingCDAY130,3787,63-32,78%
13Salesforce.comCRM311,75222,2-28,72%
14AdobeADBE699,54504,87-27,83%
15PTCPTC153,73113,37-26,25%
16DXC TechnologyDXC44,1832,7-25,98%
17 Fidelity National Information ServicesFIS155,96115,56-25,90%
18Skyworks SolutionsSWKS204151,94-25,52%
19NvidiaNVDA346,47259-25,25%
20AutodeskADSK344,39258,69-24,88%
21Monolithic Power SystemsMPWR580436,51-24,74%
22QorvoQRVO201,68152,72-24,28%
23IntelINTC68,4953,6-21,74%
24Fleetcor Technologies.FLT295,36236,75-19,84%
25eBayEBAY81,1965,2-19,69%

CONCLUSION

Stock picking is the sport to learn to play in 2022, perhaps taking advantage of the confusion to start allocating a slice of your portfolio to alternative assets, where the entry ticket is becoming more affordable for non-millionaires incomes. Surgical selection of sectors and individual stocks cannot be done alone, not even in passive strategies, where the range of instruments is increasingly broad and diverse. Chasing day by day and hour by hour media headlines that casually move from slumps to rallies to get read seems like the surest way to hurt yourself.

DISCLAIMER

This posrt is for informational purposes only and does not constitute an offer to sell, a
solicitation to buy, or a recommendation for any security, nor does it constitute an offer to
provide investment advisory or other services by the author. No reference to any specific security constitutes a recommendation to buy, sell or hold that security or any other security. Nothing on this post shall be considered a solicitation or offer to buy or sell any security, future, option or other financial instrument or to offer or provide any investment advice or service to any person in any jurisdiction.

Before investing do your research!

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