Tech stocks’ big plunge: How latte prices and Fed rates help explain the “correction”

Color of the week: red... We're not talking lipstick. Last week the Nasdaq index entered correction territory — a drop of 10% or more from the most recent high — for the first time since March. The Nasdaq is the techiest of the Big Three US indexes.

• Big Tech: More than half of the Nasdaq’s 3K+ stocks are tech. After gaining 22% last year, it's down 13% from its November record (#corrected).
• Big Red: 40% of Nasdaq stocks have fallen by half since November.

Some ingredients… of the tech sell-off: Most are related to inflation, which is nearly at a 40-year high as demand > supply. To tame rising prices, the Fed is expected to hike rates at least three times this year. The problem for tech stocks: They’re “competing” with other investments.

• Rising interest rates can make US gov’t bonds and savings accounts more attractive compared to riskier assets like tech stocks.
• Wall Street tends to value stocks based on their potential future returns (key word: future). But $1 today is worth more than $1 tomorrow because… inflation.
• As interest rates rise, the value of a dollar today also rises because it could be invested ASAP in bonds or savings with higher returns. But the prices of many high-flying tech stocks are based on potential growth. That’s one reason Tesla’s worth 12X as much as GM, despite having only a quarter of its sales.
• Opportunity cost: As the potential returns from lower-risk investments (like US gov’t bonds) rises, investors want to see higher returns from tech to justify prices.

The TLDR… Tech shares soared as the Fed gave us near-zero rates during the pandemic, since any potential growth seemed better than zero interest. Now that rates are rising, tech is rebalancing. The Dow — which is heavier on non-tech stocks with lower expectations of fast growth — is barely down.