Greetings from sunny Las Vegas, Nevada!
I’m in town for the annual Consumer Electronics Show (or CES).
Each year, the conference covers the entire Las Vegas strip. And exhibitors come from around the world to show off the latest in artificial intelligence, self-driving cars, gaming, wearable tech and much more!
So far, my favorite exhibit has been the “Amazon room” which showcases a wide variety of tech that can be used in your home, your car, and throughout your daily life.
I’m impressed with the new home gadgets Amazon is rolling out. And many other companies here have some intriguing technology that we will all be using in the months and years to come.
But as I walk through the halls and take notes on stocks I want to research, I’m also very aware of the risks in play.
That’s because the Federal Reserve is creating a major headwind for emerging tech companies. And that’s bad news for investors in the more speculative tech stocks.
A War Between the Fed and Tech Stocks
As inflation continues to run hot, the Federal Reserve is working hard to cool the economy.
By raising interest rates, the Fed hopes to give consumers an incentive to keep more cash on hand, while spending less.
If consumers spend less, companies won’t be able to charge as much and inflation will cool.
The Fed also hopes to keep the stock market from ramping higher. Thats because the wealth effect from a strong stock market can make inflation worse. But if investors lose money — or simply tread water without locking in big profits — inflation will ease.
Higher interest rates give investors options to generate returns from savings accounts, CDs and other fixed income plays. And more opportunities in these areas has led to more cash coming out of the stock market.
Emerging tech stocks are particularly vulnerable to higher interest rates for two reasons.
First, these companies earn small profits today — with the potential for much larger profits in years to come.
When interest rates are high, investors have better options to make profits now (instead of years from now).
Second, many of these tech stocks still need extra capital to grow the business. And with higher rates, it becomes more expensive to borrow cash for growth opportunities.
Bottom line, the Fed’s aggressive campaign to hike interest rates continue to drive many tech stocks lower.
And here’s why that campaign isn’t likely to end soon.
Higher Wages (and Inflation) Ahead
Take a look at this chart. It shows the number of current job openings in the U.S. economy.
Jerome Powell and other members of the Federal Reserve have already made it clear that they’re watching the job market closely.
And with companies still competing to fill open positions, wages will keep climbing.
This naturally stokes inflation because higher wages will lead to more spending and higher prices.
So until the job market starts to cool, the Fed will continue to do its best to slow the economy.
That’s bearish for tech stocks. And specifically for companies that don’t earn profits yet — and for stocks with high values compared to small earnings per share.
The age-old maxim “Don’t fight the Fed” still applies.
I’m taking good notes on these tech stocks for when it IS time to buy tech names. But until the Fed gets inflation under control, you should play “defense” with your investments.
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If you would like to learn more about how this process works, consider subscribing to this program. It comes with a detailed trading manual which explains my strategy and philosophy behind these bearish trade opportunities.
While past performance is no guarantee of future results, I’m proud of our 191% return in 2022. Keep in mind, this is a high-risk / potentially high-return approach so please don’t risk capital you can’t afford to lose.
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Here’s to growing and protecting your wealth!