Tech - Will this time be different?

In my opinion, the better question is whether what we’re currently seeing is a repeat of the early 2000’s or what was later renamed the Dot.Com era? But why?

For three major reasons:

1. Tech stocks (NASDAQ) were trading at extremely high valuations (PE’s)
2. The US started to tighten their monetary policy (US rates were hiked 6 times between Jun ‘99 & May ‘00)
3. There was an economic downturn (and later a recession)

To answer “why”, we need to look at possible reasons why we’ve seen such a dramatic recent decline in tech stocks.

Firstly, the NASDAQ was still trading at valuations last seen during the so-called Dot Com era at the beginning of this year, even though its economic growth had not reached expectations, and everybody knew that interest rates were only moving in one direction and that was up. In March this year, the FED decided to tighten its monetary policy and increased rates for the first time since 2018. We all know what effect interest rate hikes have on both economic– and earnings growth. This week the FED (June 2022) surprised the market by hiking rates for the third time, but rather than increasing the FED rate by 0.5% as expected, they decided to raise rates by 0.75%. This has caused quite a few prominent economists to state that in their view, the US will undoubtedly go into recession soon.

Even after a decline of 33% (up to 13 June 2022) off its highs, one can see that the NASDAQ is still not trading at levels that can be considered very cheap, and history has shown us how P/Es can drop and stay low for some time.

What we do know, for now, is that inflation is still not under control, and according to the FED, interest rates will continue to increase this year. During the Dot Com correction, the NASDAQ traded 36% off its highs six months prior. Back then, investors asked the same questions we’re asking now, and they were answered – 18 months later. The NASDAQ was trading down a further 40%. Will this time be different?