How to Make Money From the 2022 Tech Stock Sell-Off?

Tech stocks worldwide witnessed the biggest sell-off in over a decade at the start of 2022. Here’s how you can make money from this dip.

| More on:
tech and analysis

Image source: Getty Images

Technology stocks across the globe witnessed the biggest crash at the start of 2022 after an accelerated surge in 2020 and 2021. Hedge funds dumped their high-valuation tech stocks between December 30, 2021, and January 4, 2022. This was the biggest sell-off in dollar terms in over a decade, according to Goldman Sachs’ data reported by CNBC. The Nasdaq Composite Index dipped 8.9%, and the iShares S&P/TSX Capped Information Technology Index ETF (TSX:XIT) 15.3% since December 30, 2021. 

When hedge funds come into the picture, investors who have burned their hands in meme stocks look at the short interest in the share. But hedge funds are selling their long positions in tech stocks, and there is no profit booking in short-selling as was seen in the last two months of 2021. Why are hedge funds selling? Are they vacating a sinking ship, or have they found an opportunity elsewhere? 

What is causing the 2022 tech stock sell-off? 

Goldman believes the Fed interest rates are behind the tech stock sell-off. The U.S. Federal Reserve hinted that it might hike interest rates and reduce bond purchases in 2022. When interest rates rise, borrowing becomes expensive, thereby impacting businesses and consumers. 

Add to this, the rising inflation and consumers have less money to spend. A slowdown in consumer spending could reduce revenue for e-commerce and other consumer goods companies. An increase in borrowing costs could impact the profit of companies with high leverage. The stock market tends to react immediately to interest rate changes as it prices in future growth. 

The near-zero interest rate and fiscal stimulus money brought liquidity into the economy that inflated stock prices in the last two years. Investors preferred investing in the stock market instead of the bond market. Tech stocks attracted investors because of their high revenue growth rate and promising outlook. Investors priced in 10 years growth for Shopify (TSX:SHOP)(NYSE:SHOP). Hence, hedge funds acted fast and booked profits on the news of increasing interest rates. 

This inverse relationship between interest rates and the stock market caused the tech sell-off. Many value investors feared a 2001-like bubble as tech stocks surged to the 2001 level. During the late 90s, investors dumped money in anything technology. Suddenly they pulled out from the market in 2001 when the business was not sustainable. But the 2022 sell-off is an after-effect of tightening monetary policy, which means hedge funds are not vacating a sinking ship. 

How to make money from the 2022 tech stock sell-off 

Now, every major stock market momentum presents a risk and an opportunity. It depends on how you play the momentum. You can reduce the risk and increase returns through portfolio diversification and smart asset allocation. In investing, one’s loss is another’s profit as money changes hands. You have to see where the money is going and follow suit. 

Financial stocks tend to benefit from rising interest rates, as they can charge higher interest for loans. Commodity and energy stocks tend to benefit from rising inflation, as they can get higher prices for their output. 

Royal Bank of Canada and Suncor Energy could flourish in a high-inflation, high-interest rate economy. They will also benefit from economic growth. The two stocks have surged 13% and 19%, respectively, since December 20, 2021. Now, these stocks won’t exactly make you rich but they could balance your portfolio returns when high-growth tech stocks fall. 

Should you buy the dip? 

The question is should you buy the 2022 tech dip? Tech stocks are falling because of interest rate changes. Their fundamentals are still strong. The e-commerce wave, digitization, cloud services, and 5G are long-term trends changing how you live and work. They might see a slowdown in the short term, but their long-term growth potential is intact. 

If you are unsure which tech stock to buy, the XIT ETF is a good way to get complete exposure to the tech sector’s overall growth. Another good stock is Shopify, as it is leading the e-commerce wave. You can also look at my previous article where I mentioned a few tech stocks worth buying in the dip. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns and recommends Shopify. Fool contributor Puja Tayal has no position in any of the stocks mentioned. 

More on Tech Stocks

tech and analysis
Tech Stocks

3 Undervalued Tech Stocks to Buy Now

Canadian investors still have time to snag undervalued tech stocks like Nuvei Corporation (TSX:NVEI)(NASDAQ:NVEI) and others in the spring.

Read more »

consider the options
Tech Stocks

3 Beaten-Down Growth Stocks Trading at Massive Discounts to Wall Street Estimates

Growth stocks such as Roku and Cresco are trading at massive discounts compared to Wall Street price target estimates.

Read more »

Profit dial turned up to maximum
Tech Stocks

Constellation Software (TSX:CSU): Spending Spree Continues!

Constellation Software (TSX:CSU) spent over $200 million on investments in the first quarter.

Read more »

Financial technology concept.
Tech Stocks

Tech Meltdown: 2 Tech Stocks to Buy the Dip

Tech stocks are in a meltdown. But two tech stocks outperformed the Nasdaq and the tech ETF. It's time to…

Read more »

what to do when stock market falls
Tech Stocks

TFSA Investors: This 1 Tech Stock Could Help You Become a Millionaire

TFSA investors may consider buying this Canadian tech stock now, which could multiply their savings and help them become millionaires…

Read more »

Hand holding smart phone with online shop concept on screen
Tech Stocks

E-Commerce and Recession: Has Shopify Stock Hit the Bottom? 

Shopify (TSX:SHOP)(NYSE:SHOP) stock has dipped almost 80% over recession fears. Is this the bottom, or there is more downside? 

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Tech Stocks

Docebo’s Earnings Were Surprisingly Decent

Docebo Inc (TSX:DCBO)(NASDAQ:DCBO) was a pandemic-era winner. Its recent earnings release was just so-so.

Read more »

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

These Tech Stocks Are Finally Trading at a Discount

Tech stocks like Constellation Software (TSX:CSU) are finally trading at a discount.

Read more »