The broader stock market entered 2022 on a bullish note, with the S&P 500 hitting a new record high in early January and the tech-heavy NASDAQ reaching record levels in November 2021.
Optimism that stocks would continue their strong ride in 2022 ended abruptly, with decades-high inflation, interest rates at their highest levels since 2008, and fears of a recession sending stocks lower.
By October, the S&P 500 had lost 26% of its value. That pales to what happened to tech stocks. In that same month, the Nasdaq hit a 52-week low of 10,088, representing a 36.3% year-to-date loss. The Nasdaq includes all kinds of tech stocks, large and small.
How Have Large Cap and Small Cap Tech Stocks Been Doing?
Technology stocks, large and small, were some of the biggest winners when the pandemic hit more than two years ago because their products and services played to the weaknesses of COVID-19.
For more than two years, tech companies saw their operations explode as businesses sent employees to work from home and schools pivoted to online classes. Bored, quarantined individuals spent money on smartphones, computers, games, fitness equipment, and video conferencing software. They also spent more time shopping online.
To combat the pandemic and save the global economy from ruin, central banks, including the Bank of Canada and Federal Reserve, lowered their key lending rate, to record lows.
Low interest rates are great for technology stocks because it costs less to borrow money. Many tech stocks, especially smaller start-ups, are not profitable and need capital to build out their operations.
This dynamic changed in 2022 when central banks began rising interest rates to curb inflation. This makes it more costly to borrow money and carry that debt, which can negatively impact a company’s bottom line.
Higher rates and inflation also make it more expensive for households, which could cause a cutback in spending, and in turn, stifle economic growth and lead to a recession.
On top of that, with people returning to work and spending less time at home, the technology sector is suffering big losses with investors fearing elevated share prices boosted by the pandemic may be running out of steam.
The big question for investors now is, how will big and small cap tech stocks perform during a possible recession and which ones will perform best during a recovery?
How Will Technology Stocks Respond to a Recession?
The return to normalcy and fears of a recession are working against many tech stocks; it’s virtually impossible for all technology stocks to maintain the growth they experienced during the pandemic.
If anything, many tech stocks are seeing their revenue fall to pre-pandemic levels.
These concerns are forcing investors to revaluate ultra-risky assets like high-growth tech stocks. This has resulted in investors exiting riskier equities and heading for more stable, safe haven investments.
Small technology stocks tend to be more sensitive to economic changes, including rising interest rates, than larger tech stocks. As a result, smaller tech stocks generally sell off faster in the lead up to a recession and during a recession.
Based on how stocks performed during the 2008/2009 financial crisis, tech stocks could face a lot more pressure, with additional potential losses in the 30% to 40% range.
Not all tech stocks look at recessions through the same lens, though. A lot of smaller tech stocks have never been through a downturn or recession. Should we face a recession in 2023, smaller tech stocks would look to protect their bottom line, cut their head count, reduce research and development (R&D) spending, and find ways to improve operational efficiency.
Big tech stocks like Facebook, Apple, Netflix, Google, Microsoft, and Amazon (FANGMA) may still be taking a beating (they’re facing the same issues everyone else is), but they aren’t panicking in the same way. That is, if history is any indicator.
In 2008, Paul Otellini, then CEO of Intel, said that during economic downturns like a recession, the company doubles down on R&D, hires more people, and looks for strategic acquisitions. Otellini noted that since tech was never going away, Intel and other major technology players needed to be ready for a recovery.
Fast forward to 2022 and despite recessionary fears, Google is hiring more engineers, Microsoft has doubled its employee bonus pool and is making expansion plans, and Apple has begun construction at its north San Jose property and is building a $1 billion office campus in Austin, Texas.
During the 2008/2010 Great Recession, big tech companies like Google, Apple, Microsoft and Meta (then called Facebook), acquired more than 150 companies and thousands of IPs from small tech companies that were forced to shutter their doors.
The end result? Thanks to these investments, big tech companies exited the recession and entered the recovery larger, stronger, and more profitable.
What Kind of Technology Stocks Perform Best During a Recovery?
A recovery is actually a boon for both well-established tech stocks, like FANGMA companies and nimble, smaller tech stocks, as investors shift from higher interest rate headwinds to earnings resilience and risks.
Some may compare the current sell-off in tech stocks to the 2000 dot-com crash, but it’s entirely different. Tech stocks are in a lot better shape financially and are less expensive than they were in the 1990s.
In late 1999, the Nasdaq was trading at more than 100 times forward earnings. In November 2021, near the last record high, the Nasdaq was only priced at 33 times forward earnings. While the sell-off hasn’t been as severe as it was in 2000-2003, many excellent tech stocks are trading at serious discounts.
And when it comes to a broader recovery, bigger is typically better. FANGMA stocks were industry leaders before the sell-off and because of their massive size (a combined market cap of over $6.9 trillion), diversified operations, and ubiquitous presence. These blue-chip technology stocks will continue to be wildly successful over the long run.
What Is the Best FANGMA Technology ETF?
There are several ways investors can add FANGMA companies to their portfolios. For those bullish investors eager to buy the dip, it would cost approximately $1,000 to buy one stock of each company.
There’s an easier way to take a position in the FANGMA stocks, and that’s through an ETF. The Evolve FANGMA Index ETF, TECH ETF (TSX: TECH), is a uniquely Canadian investment solution dedicated to investing in these six technology titans – Facebook (Meta), Apple, Netflix, Google, Microsoft, and Amazon.
Through TECH ETF, investors get equal-weighted exposure to the Big Six securities, for a reasonable unit price of around $7.45 (as at November 30, 2022).
The index is rebalanced every quarter and because it’s listed on the TSX, eliminates issues with buying foreign securities and estate tax issues.
Investing in FANGMA with Evolve ETFs
Gain exposure to six tech giants in one ETF. With the Evolve FANGMA Index ETF (TECH ETF) investors get exposure to all six companies – Facebook, Amazon, Netflix, Google, Microsoft and Apple – for a reasonable unit price. Make investing in big TECH easy. For more information visit the fund page here: https://evolveetfs.com/tech/.
Bullish on big tech? The Evolve Enhanced FANGMA Index ETF (TECE ETF) allows investors to get 125% exposure* to all six tech giants. To learn more about this newly launched technology etf, visit: https://evolveetfs.com/tece/.
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