Should I switch out of tech stocks?

I've read that tech stocks have fallen dramatically. Should I be considering switching out of these in case they fall further; or is it in fact a good time to be invested, as I've heard things about buying cheap when stocks are down.

Name withheld

Schalk

Louw, Wealth Manager at PSG Wealth, Old Oak, replies:

This is a popular topic, but in my opinion, the better question is whether we’re currently seeing a repeat of the early 2000s “Dot. com” era. Why? For three major reasons:

1. Tech stocks (on the Nasdaq exchange) were trading at extremely high valuations;

2. The US has started to tighten its monetary policy (rates were hiked six times between June 1999 and May 2000);

3. There was an economic downturn (and later a recession).

We need to look at possible reasons why we’ve seen such a dramatic decline in tech stocks.

Firstly, the Nasdaq was still trading at valuations last seen during the so-called Dot.com era at the beginning of this year, even though economic growth had not reached expectations.

In March this year, the US Federal Reserve decided to tighten its monetary policy and increased rates for the first time since 2018.

We all know what effect interest rate hikes have on both economic and earnings growth.

Last week the Fed surprised the market by hiking rates for the third time, but rather than increasing the rate by 0.5% as expected, it raised rates by 0.75%.

This has caused quite a few prominent economists to state that, in their view, the US will undoubtedly go into recession soon.

Even after a decline of 33% (to June 13) off its highs, the Nasdaq is still not trading at levels that can be considered very cheap, and history has shown us how share prices can drop and stay low for some time.

What we do know is that inflation is still not under control and, according to the Fed, interest rates will continue to increase this year. During the Dot.com correction, the Nasdaq was 36% off its highs of six months previously.

Back then, investors asked the same questions we’re asking now, and they were answered – 18 months later.

The Nasdaq was trading down a further 40%. Will this time be different?