High-growth tech stocks are tumbling. Why?

In recent years, the face of innovation investing has been Cathie Wood and her Ark Innovation ETF (ARKK).

The fund — which includes hot tech names like Tesla, Roku, Zoom, Twilio, Coinbase, Square and Spotify — had a huge runup in the first year of the pandemic.

But the high-tech growth investing story has had a very very very ugly 2022, though. (Like, really ugly.)

ARKK is down 24% year-to-date…

… which is much worse than the 8% loss for the broad market S&P 500 index.

An even more interesting comparison is Ark and Berkshire Hathaway, Warren Buffett’s ~$680B conglomerate, which has significant stakes in much less sexy industries like energy, utilities, insurance, housing, and railroads.

Since the beginning of last year (2021), Ark is down 40%+ while Berkshire is up 30%+.

What’s happening?

According to the Financial Times, the recent market gyration is a rotation from growth to value stocks:

• Growth investors prefer companies “that may not be profitable but are expanding rapidly” (like many of the aforementioned Ark names)
• Value investors are “are more price-sensitive, and often look for bargains in dowdier or beaten-up industries [energy, banks]”

The shift is being brought on…

… by the US Federal Reserve, which plans to hike interest rates and pull back on the loose monetary policy enacted to boost the economy during covid.

Higher interest rates will help to fight rising inflation. But it also historically hurts high-growth tech stocks.

Why? Because the valuation of these companies are based on future profits, which are worth less in a higher interest rate environment.

Today, the Fed begins a 2-day meeting to discuss the central bank interest rate and bond-purchasing plans. Depending on what they decide, things could get uglier still.