Actionable Insights: It’s back to the future on a return to the tech trade
March 29, 2022 | Anastasia Amoroso | iCapital
A valuation reset has underpinned a tech stock rebound in recent weeks. We would advise staying with the momentum for now, as historical precedent and seasonality suggest it may have some room to run, but rising one-year recession probabilities argue for layering in some hedges.
We are back from spring break and the Nasdaq is back from its March 14 lows, rallying 14.1% higher.1 Outperforming that, unprofitable tech jumped 32.2% and NYFANG stocks rose 24.6% over the same period.2 We highlighted in our last note on March 17 the reasons why we expected a further tactical bounce and advised adding exposure to the Nasdaq.
The tech trade, including speculative tech (“spec tech”), has been working again. Why is this? And will it last? We do think the Nasdaq could continue to be a near-term catch-up trade—it is still down 8.3% year-to-date versus a 4.0% decline for the S&P 500.3 Investors should not exit this rally too early, but we’d definitely take advantage of lower volatility to layer in some hedges.
Why tech rebounded and why it could continue
Two factors have been driving tech higher in recent weeks.
First is short-covering activity.4 We wrote in early February that shorts were elevated in spec tech trades and a rally could trigger a wave of short covering that would in turn amplify the rally.
The second factor is individual investors buying the dip. According to JPMorgan, last week retail traders bought a net $5.6 billion—a standard deviation of 1.6 above the 12-month average of $3.3 billion, with notably strong inflows into Nasdaq 100 stocks.5
This begs the question, why tech versus anything else? Well, in a highly uncertain economic environment you first buy things in which you have a really high long-term conviction. For most people, that would be tech. But more broadly, we see three main market drivers for the rebound:
