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The technology sector saw some of its worst losses in 2022 as inflation ramped up and Central Banks were tasked with increasing interest rates to fight the record high inflation. As the cost of borrowing has increased, start-ups and other small cap, growth sectors have suffered immensely. The current Federal Reserve funds rate is 4.25-4.50% which is a far cry from the almost 0% rates seen during Covid 19.
The technology sector in particular has seen the higher rates effect their operating costs and many companies have had to enact steep staff cuts. Most of the major technology players including Amazon, Microsoft and Google have all made large staff cuts. This includes firing 18,000,10,000 and 12,000 employees respectively. The cuts were blamed on a slowing economy and excessive hiring that has occurred in previous years. They have also coincided with large drops in the share prices in many of these companies.
The question now, is whether the bottom has been put in and is now a good time to enter into many of these stocks? All though these cuts have occurred, the recent trend for growth equities, especially in early 2023 has been extremely positive. With hopes that inflation has peaked and that the Federal Reserve pivoting the sector has recovered despite these cuts. Therefore, it is possible that the cuts and poor performance have already been prices into the market. Another factor that might support a rise in growth assets may be due to a potential rebound in China. As China awakes from its Covid 19 slumber, one theory is that an accelerated rebound will support growth assets and economies.
Looking at the weekly price chart of both the Russell 2000 and the Nasdaq as proxies for these sectors, the long term outlook shows that the price has bounced off the support zone. The price has bounced on the Russell three times and the Nasdaq twice. In addition, the 50 week and 200 week moving average are converging which indicates that the prices are bottoming out or at the very least consolidating. This indicates a potential a reversal in the short term future.
With more economic data to come out and the FOMC meeting next the Russell 2000 and the Nasdaq may find some fuel to continue to rise.
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