If you follow market changes closely then you’ll know that, at the beginning of December, investors began dumping tech stocks. Why? The sell off was driven mainly by two factors. First, the Omicron variant had just made major headlines and was beginning to take hold in the United States. Secondly, the Federal Reserve made an important announcement.

The Fed Chair Jerome Powell said at the beginning of the first week of December that the US central bank would consider, at an upcoming meeting, a faster wind-down of its bond-buying program. The goal? Helping alleviate some of the wild changes brought about by the surging price pressures. The result? We’ve now become aware that the Fed is planning on three separate interest rate hikes in 2022.

As Reuters reported, this all spelled out increased caution for risk assets, which could have been a root cause of the massive tech sell off. “Even if Omicron is not too virulent, all of this, coupled with a hawkish Fed, speaks to increased caution for risk assets, although if corporate profits continue upward, overall equities should still rise except perhaps many of the most expensive ones," said John Vail, chief global strategist at Nikko Asset Management.

Let’s dive into this more and see what it means for you and tech stocks in 2022.

What’s Happened with Tech Stocks in December 2021?

During the week leading up to Christmas, quite a few mega cap tech stocks started to show big losses. Microsoft, for example, dipped 0.3% in just one day and brought the weekly decline down to 5.%. Alphabet and Apple also fell more than 4% in the same week.

This comes along with recent reports that Alphabet was 2021’s top-performing tech stock. Alphabet’s stock rallied almost 70% this year, increasing the company’s market cap to close to $2 trillion. This is largely due to the fact that the COVID-19 pandemic is still in full force and workers have been relying more than ever on Google digital services.

While they’ve seen a gain, it doesn’t mean that people aren’t still selling off their stocks. As well, it doesn’t mean that the tech sector as a whole is performing equally as impressive. Microsoft stock is up 51% in 2021, compared to a 33% gain in Apple stock, a 23% gain in Facebook stock (now called Meta), and a measly 5% increase in Amazon gains for the year.

Note: The big difference between Alphabet and Facebook gains, for example, is due to the fact that Google has fared better with iOS privacy changes than platforms like Facebook.

Selling Tech Stocks, But in Exchange for What?

As mentioned above, the root cause of this appears to be, at this point, no longer about the Omicron variant surge. It appears to be more driven by the Fed’s recent announcement that they plan to increase interest rates 3x during the course of 2022.

As a result, investors are selling off tech stocks and swapping them for consumer staple. Jim Paulsen, a chief investment strategist at The Leuthold Group, told CNBC that, “As the Federal Reserve turns more hawkish and expectations for higher interest rates rise, investors are lowering exposure to growth stocks.” 

His reasoning behind this guess? “Typically, growth stocks exhibit a higher duration compared to value stocks because a higher proportion of their cash flows will be received in the more distant future.”

What Caused This Hype in Tech Stocks?

Why were so many people buying tech stocks in the first place? As Robbe Delaet notes, when the pandemic started in 2020, disruptive tech stocks became pretty attractive. With everybody at home and on Slack, Zoom, and similar platforms, many investors saw an attractive opportunity to get in early on what appeared to be a years-long growth of these tech stocks.

During the last half of 2021, this proved to be a problem, though. The insane amount of money that people were investing in these tech stocks caused their valuations to grow to unsustainable levels. Therefore, tech stocks once again became risky investments. And, as Delaet also points out, “as valuation risks become unbearable and macro-economic challenges increased, this asset class started to sell off significantly in November [2021].”

This all resulted in mid-cap stocks going down double digits leading up into the holiday season. At the beginning of December, for example, Asana was down 51%, Cloudflare was down 24%, and Ruku was down 27%.

What’s This Mean for Investors in 2022?

2022 is going to be unpredictable (yes, more than usual) due to the Fed’s proposed interest rate increases. Our Founder & CEO (who’s also an investment expert and CFA), had this to say about investing in 2022:

“What happens when the Fed increases interest rates like this is that the market becomes brittle. When people invest, they are naturally looking for reasons to sell anyway, and with a market that shifts like a sand dune in the desert wind, this is even more true. This all creates the potential for meaningful sell offs, but that doesn’t mean I recommend selling immediately. 

Instead, my advice is to never be fully invested and to always be forewarned. The truth of the matter is, anything could happen next year. I’m definitely not recommending that you sell everything, and I certainly won’t, because we all just have to wait and see. Ultimately, I suggest that you prepare for volatility and don't be surprised when it happens.”

Ultimately, the recent big tech growth rates that we’ve seen throughout 2020 and 2021 are unsustainable. That, coupled with historic data that shows tech companies weren’t as “safe” as they’d been predicted to be during the 2000 market dip.

What should you focus on doing? As always, expect volatility and continue investing in high-quality businesses. And, don’t forget to browse through our YouTube channel to view videos about topics like this and so much more. 

To start off learning more about how to prepare for changes in the 2022 stock market, view our video on How to Screen Stocks.