Special Report: In this Stockhead series, Josh Gilbert – market analyst at global investment platform eToro – gives investors the scoop on all things Nasdaq related; the key market themes, along with popular investment trends based on eToro’s data and insights.

2022 gets off to a spicy start

It was a tough week for markets to kick off the year, with volatility across the board and the Nasdaq taking a beating — finishing down by around 4.5 per cent for the week.

Much of that volatility appeared to be stemming from jitters surrounding the pace of the Fed’s policy tightening program, after the release of the central bank’s December meeting minutes confirmed it was committed to multiple rate hikes in 2022.

Following the Fed news, it was more rumblings in the bond market that gave rise to some equity volatility as the yield on benchmark US 10-year bonds briefly pushed above 1.8% for the first time since December 2019.

However, the by-product of those moves is that it increases the likelihood of the Fed’s pending rate-cycle ultimately becoming increasingly well priced into the outlook for stocks.

Fed cred(ibility)

In that context, moves afoot from policy makers to start reducing stimulus can be viewed on one hand as a positive development, because in effect it decreases the risk of a policy error.

One of the biggest risks to investors is if the Fed loses control of the economy and the markets by keeping the stimulus taps on.

However, the good news is that rate hikes are happening because the economy is strong, and the Fed is confident that the economy can handle a move towards policy normalisation.

History repeats

Another point to note is that the move higher in US bond yields is a repeat of what we saw in the March quarter of 2021.

Back then, the changes in the bond market happened in response to news of positive vaccine trials, and the prospect of a ‘reopening trade’ with higher inflationary forces.

Right on cue (in February last year), equities tumbled — but then they survived. And we expect a similar situation to play out this time.

Moreover, as markets head into Q4 US earnings season, we’re anticipating robust earnings growth of around +20% on average from the biggest and best-known US tech leaders. In turn, that positive earnings momentum will help support markets at current valuations.

More volatility in store?

All that being said, the prospect of tighter monetary policy after almost two years of emergency pandemic stimulus means that volatility is likely to remain elevated.

In turn, it’s also likely that investors will remain cautious over high the higher valuation multiples that have been applied to a number of US tech stocks.

However, with large drawdowns on many tech names, opportunities will arise. As bond yields rise, we can expect a more subdued performance from some tech stocks, whereas strong economic growth will help cyclical assets. In that environment, a long-term investing approach and diversification are key.

Disruptive tech will remain vulnerable, but we may also see ‘big tech’ as the new ‘defensives’ in the next phase of the post-COVID cycle.

Tech giants such as Apple and Amazon are enjoying solid growth and high margins with fortress balance sheets that help justify their high valuations.

Apple recently hit the $3 trillion market cap mark — the first ever company to do this.

In 2021, Apple shares rose by 30 per cent, outperforming benchmark indices and solidifying its name as the biggest and best.

Investors don’t have to focus on ‘disruptive’ tech to see returns or try to find a needle in a haystack, and Apple is a clear example.

Its share price has gained 574 per cent in the last five years (since January 4, 2016) — a return of 110 per cent per year on an annualised basis.

This article was developed in collaboration with eToro, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.