What happened to tech stocks in January and what does that mean for the year ahead?

By Harvest ETFs

After functioning as the market growth engine of 2021, tech stocks took a serious tumble in January. By January 27^th, the NASDAQ 100 Technology Sector Index had fallen by 15% from its peak at the end of December. The sell-off in tech sparked panic and confusion among many investors and wider fears about how 2022 will compare to last-year’s bull market.

While macro forces and investor fears continue to work across equity markets, James Learmonth is looking at tech fundamentals. Learmonth, the Senior Portfolio Manager at Harvest ETFs responsible for Harvest Tech Achievers Growth & Income ETF (HTA:TSX), explained that while tech stocks had become a little expensive going into 2022, the initial tech sell off was sparked more by apprehension about growth than any fundamental weakness in the strongest tech companies.

“This really started late in 2021 when a few software companies reported their earnings and gave guidance for 2022. The earnings all came in fine, but the guidance came in a little bit below expectations,” Learmonth said. “There was some debate as to whether that was just general conservatism, or whether that was indicative of companies pulling their tech spending forward during the pandemic from future years, pointing to a demand slowdown. In the absence of any new information, those worries got compounded as we moved into January and combined with concern about an increasingly hawkish Fed putting pressure on growth stocks in general.

“An environment where the Fed is hiking causes you to discount future cash flows at a higher rate, which puts additional pressure on the multiple, combined with fears of slowing demand and you’ve got a two-pronged attack on technology.”

The big takeaway, from Learmonth, is that anxiety and macro forces, not underlying fundamentals, drove divestment from tech in January. He explained that late in January, we were reminded of tech’s strength when more earnings reports came in from giants like Microsoft and IBM.

IBM’s earnings surprised investors on the upside, who proceeded to flock to the stock. Microsoft also reported very strong earnings and positive forward guidance, as did Texas Instruments. Performance from the sort of large-cap, high-quality companies held in HTA, in Learmonth’s eyes, points to fundamental strength in the tech sector that is likely to outlast any particular dip.

HTA’s performance in January was roughly in line with the sector, some holdings in the portfolio were hit hard while others, like Intel and Visa, have done relatively well. Learmonth explained that Intel’s strength in January can be attributed to its relative underperformance in 2021. With lower valuations already, it didn’t experience the same selling pressure as some 2021 winners.

HTA is also designed to deliver a steady income stream for investors along with growth potential. That’s achieved through the use of a covered call strategy which, Learmonth explained, acted as an insurance policy for the ETF’s distribution in January. That meant the ETF didn’t have to sell any holdings to make its distribution, keeping its position to capture the fundamental strength that remains in the tech sector. In fact, the ETF is set to raise its distribution in February, powered by the success of its covered call strategy.

With a focus on quality and the yield insurance a covered call provides, Learmonth is looking long-term at tech. He sees a sector that remains as fundamentally strong as ever, with multiple long-term growth drivers. Nothing in the past months has indicated that those long-term trends are going anywhere.

“HTA provides a diversified way to participate in those growth drivers,” Learmonth said. “We’ve got exposure to things like cybersecurity where we see very strong long term tail winds for growth. We’ve got exposure to cloud based infrastructure plays like Microsoft and software-as-a-service plays like Adobe and salesforce.com. We’ve got exposure to artificial intelligence and through names like Nvidia and AMD, which are going to continue to see spending on high end processors. We’ve got exposure to data center growth, which along with that cloud infrastructure as a service theme is going to continue to see spending. Companies like Broadcom and Cisco, continue to see growth flow to them through those themes as well. And then Accenture is a leading global IT services name they’ll still benefit from kind of tying all these things together as companies really continue to move through the digitization process.”

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