Is the NASDAQ Rout Rational?

Adam Johnson

Portfolio Manager

This week’s reader question is about the tech stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. sell-off:

Is the recent growth stockA stock whose issuing company is expected to grow at a significantly higher rate than the market. sell-off rational, and how long might it last?

Change can be difficult to stomach. After pumping trillions in liquidityThe ease with which an asset can be bought or sold. Assets for which there are many buyers and sellers at any given time are highly liquid (for example, a stock which trades on a public exchange). Assets which trade rarely are illiquid (for example, a Picasso painting or a high-end home). into the banking system during the pandemic, the Federal Reserve is poised to pull the punch bowl from the party.

One knee-jerk response? Traders are dumping growth stocks—particularly technology stocks—with abandon. In recent weeks, nearly 40% of the 3,000 stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. in the NASDAQ composite index have fallen at least 50% from their all-time highs. More than 220 well-known companies with market capitalizations of at least $10 billion have fallen 20%. Not even stalwarts like eBay, Netflix, PayPal, Salesforce and Walt Disney have escaped the carnage.

Traders are selling on the assumption that higher interest rates will raise borrowing costs and make future earnings worth less. Fair point—but are they overreacting?

I think so. The fear pendulum has swung too far. Even if the Fed raises rates by 0.25% four times this year, the fed funds rate will be just 1% to 1.25%, and interest rates, when adjusted for inflation, could remain below zero for years. That doesn’t put up much competition for a company that is growing its earnings quarter after quarter—earnings that, after inflation, are still strongly positive.

We’ve seen so-called “taper tantrums” before—extreme selling of stocks ahead of hawkish policy changes at the Fed. Here’s the thing: Higher interest rates aren’t always bad for stocks. On the contrary, the Fed has initiated four hike cycles since 1990, and in each case, stocks gained value. Specifically, the S&P 500 index rose an average of 10.6% as the Fed lifted borrowing rates, and in three instances, stocks went on to rally significantly after hikes were complete.

Curiously, falling interest rates generally signal the more precarious environment for stocks, perhaps because the economy is already in trouble and the Fed is playing catch-up.

Change always introduces uncertainty, but history indicates that these moves by the Fed aren’t as bad as the present market drops suggest. There is a bottom in here somewhere and many potential buying opportunities.

Adam Johnson is Portfolio Manager of Adviser Capital American Ingenuity.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.