Tech stocks are back in the red. Leading the dips are e-commerce stocks Shopify (TSX:SHOP)(NYSE:SHOP) and Lightspeed Commerce (TSX:LSPD)(NYSE:LSPD). They fell over 8% today ahead of the minutes of the U.S. Federal Reserve’s March policy meeting. What is so special about the minutes that caused investors to go on a selling spree?
The Fed’s minutes: What lies inside?
In the March 16th meeting, Fed stated its expectations to increase interest rates by 25 basis points seven times this year and three more times in 2023. That means a 2.5% increase in interest rates over a two-year period, bringing the rate back to 2.75%. With this accelerated 10-step interest rate hike, the Fed aims to control inflation, which has hit a 30-year high. The Fed’s interest rate plans sent the 10-year yield to 2.64% — its highest level since March 2019.
The tech stock selloff earlier this year has priced in an accelerated interest rate hike. But there is another measure the Fed is taking to reduce liquidity in the market. It released stimulus money into the economy by buying $4.5 trillion in assets. It now plans to reduce or pause asset purchases. The minutes present the parametres of the Fed’s balance sheet tightening.
The inverse relation between tech stocks and interest rates
You may wonder what all this has to do with tech stocks. Tech stocks were inflated during the pandemic, as stimulus money and record-low interest rates created excess liquidity in the economy. Investors put some of this liquidity into tech stocks, especially e-commerce stocks. Shopify and Lightspeed were among the top gainers. Hence, when the Fed talked about withdrawing the stimulus money, all the places where this money was invested started receding. Hedge funds were the early sellers.
These tech stocks saw a jump after the Fed meeting as the announcement removed the anxiety. This brings the big question: Should you buy the dip?
Should you buy Shopify and Lightspeed stocks?
A correct entry point is crucial in determining whether you gain or lose in the stock market. Both Shopify and Lightspeed stocks have come closer to being oversold. These stocks could fall a little more and stay around this price until May. This is because April is the month of tax filing. All investors would be focused on paying their 2021 tax bills and delay investing to May. Moreover, the first quarter is seasonally low for the e-commerce market. In addition, the rising inflation could impact consumer spending.
While the interest rate is one of the factors pulling down Shopify and Lightspeed, other factors are adding to the downward pressure. But the two companies have strong growth potential riding the secular trend of e-commerce. The e-commerce potential has even attracted the attention of Google.
Google launched a “Last-Mile Fleet Solution” that helps fleet operators improve e-commerce order to doorstep delivery. The solution captures the address, plans the delivery route, enables shipment tracking, and analyzes fleet performance. Such solutions combined with volumes could help Shopify and Lightspeed optimize their operations and eventually become profitable.
The short-term downtrend has created an opportunity to buy into long-term growth at a discounted price. I would suggest buying the two stocks in phases. If you plan to invest $6,000 in the two stocks, invest $2,000 now and another $2,000 in another dip. These stocks might see more decline before May. Even in June, the business environment will determine how much these stocks rally.
