The “Anything but Tech” Rally.

The market has been on edge to start the new year with Federal Reserve chairman, Jerome Powell, announcing that the Federal Reserve will commence with hiking rates, as early as March of 2022. With the expectation being anywhere between two-three hikes this year, Goldman Sachs (NYSE: GS), has since predicted that a fourth could be in order.

With the Consumer Price Index (CPI) reporting a 7% increase year-over-year (5.5% excluding food and energy prices), the “transitory” notion of inflation is far-gone, as the Fed turns “hawkish.”

The question becomes; what should investors do with “Tech” stocks?

Rotation to Safety

Historically, rising interest rates has adverse reaction on high-multiple stocks. Names such as Teladoc (NYSE: TDOC), Carvana (NYSE: CVNA), and Roku (NASDAQ: ROKU) are all down, double-digits, year-to-date.

“Meme-Stock” leaders are sinking as well with AMC Entertainment (NYSE: AMC) and GameStop (NYSE: GME) down ~15%. Even market-leaders Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL) are all down ~3% to start the year.

With the “tech-heavy” Nasdaq, typically rising amidst falling rates, where will the Nasdaq 100 move with the 10 Year Treasury yield expected to bounce to the upside?

So far, S&P Technology (NYSEARCA:XLK) stocks has seen nearly $1.5 trillion in outflows since November of 2021. Communication (NYSEARCA:XLC) and Consumer Discretionary (NYSEARCA:XLY) names have additionally seen combined outflows of $1.7 trillion.

The 2021 playbook is still in effect as Investors are loading up on equities that have a positive correlation, or neutral correlation, to rising rates such as Financials (NYSEARCA:XLF), Industrials (NYSEARCA:XLI) and Materials (NYSEARCA:XLB). Energy (NYSEARCA:XLE) is still a top performer with WTI Crude rising above $80/barrel again.

So how should you position yourself for 2022?

“Don’t Fight the Fed”

Higher interest rates will undoubtedly lower valuations, as future cash flows are discounted in correlation to the 10-year Treasury bond. As bond yields continue to rise, unprofitable software-related businesses will continue to get hit the hardest throughout 2022, especially if the Fed progresses with their projected rate hike time-table.

For those contrarian investors, looking to downplay the severity of growing inflation and the Fed’s Hawkish position; tread lightly.

While we don’t expect a repeat of 2018, we do believe valuation multiples are going to be consolidated for some of the previous high-fliers.

The current P/E ratio of the S&P 500 is standing around 29.76, with earnings yield around 3.36%, as investors brace themselves for the start of earnings seasons for 2022.

Investors are generally optimistic about the continual “re-opening” of the economy, and the consumer’s current financial prospects. With inflation expected by many analysts to roll-over by mid 2022, stocks are poised to make new highs, regardless of the tighter liquid environment.

We recommend being cautious as earnings season commences, but are overweight financial, industrial and materials, as well as buying proven tech leaders, amidst the volatility. Avoid unprofitable companies trading at double-digit price/sales multiples and “meme-stocks” as long-term financial conditions will affect these names.

We are still bullish on the market for 2022 and are expecting the S&P 500 to touch 5000 points at some point of the year. #Buythedip