US tech stocks have taken a battering over the last few months. Following a historic low in September 2018, the Dow Jones fell sharply as, to quote CNBC, investors started to “pivot out of technology stocks.” In tandem with tech stocks falling, the value of the dollar has also taken a tumble. In the wake of a global tech-led stock selloff, November’s EUR/USD rate dipped below 1.1400, while GBP/USD slumped to 1.2775. Given the significance of the tech industry in the US, it’s hardly surprising that markets across the board have been affected by the recent downswing.
Where Tech Stocks Go, the Rest Follow
For forex traders, recent months have been particularly testing and reaffirm the significance of US financial laws. Unlike markets with little or no regulation, investors using US forex brokers are offered a certain amount of protection from potentially damaging swings. Through guidelines defined by the Commodities and Futures Trading Commission (CFTC), US forex brokers must be licensed, cap the amount of leverage they offer at 1:50, and not provide hedging options. The general idea behind these rules is to mitigate certain risks for traders.
As a practice, forex trading can be volatile. Therefore, to ensure rogue traders and outside forces don’t add any unnecessary additional risk, the CFTC has laid out strict guidelines. In the current climate, these provisions are more applicable than ever. Because tech is one of the biggest contributors to the US economy, any sense of negativity among traders is bound to affect the dollar and, in turn, the forex markets. To support this assumption, research from the Consumer Technology Association (CTA) found that US consumer tech industry generated $351 billion in retail revenue between 2017 and 2018. On a corporate level, Apple, Amazon, Google, Microsoft and Facebook each have market caps well in excess of $500 billion.
Economics and Trade Wars Hurt Risk Appetite
So, what’s fueling the movement away from tech stocks? Risk appetite among traders is one of the main factors. Through a combination of political and economic factors, the risk/reward ratio on tech stocks for much of 2018 has been too high for most. Commenting on 2018’s price fluctuations, the chief investment strategist at SlateStone Wealth, Robert Pavlik, said that uncertain interest rates and decreased consumer spending power have hurt the market.
“You have an oversold condition and the market knows it should try to find a bottom. But you have a crosscurrent of factors that’s preventing it from doing that. These factors include interest rates and earnings,” Pavlik said.
In addition to overpriced stocks and lower earnings causing a drop in tech sales, the US/China trade war has also hurt the industry. With developers and manufacturers on both sides feeling the bite of sanctions and tariffs, production has slowed and costs have increased. The end result is a drop in the value of the leading tech companies and, in turn, of the industry as a whole. Naturally, for the wise, technology will remain a key investment market. Despite the recent dip, innovation will always inspire financial support. The obvious example of this is the cryptocurrency rush of 2017. Although blockchains and digital coins were far from new, the combination of bullish sentiments and mainstream coverage led to a surge of interest in cryptos.
The Crypto Tech Revolution
Although momentum has slowed in 2018, the future of tech is still moving towards decentralization and digital tokens. For example, we already know that Ripple has been working to shake up crossborder payment technology. By using decentralized tokens (XRP) to facilitate transactions, Ripple’s xRapid removes the need for human intervention and currency conversions. In November, we learned that Ripple and Bank of America were discussing a potential collaboration.
In reality, cryptocurrency partnerships and mainstream innovations are a few years away from making an impact on the global economy, but the potential is there. For investors, the movement towards decentralized technology will also signal a shift in the tech world as a whole. While falling tech stocks have become a cause for concern in 2018, the market is far from dead. In fact, the reality is that it’s simply changing. While economic and political forces may have stifled profits in recent times, innovation will win in the end. Crypto technology won’t be the only driver in the coming years, but it will undoubtedly add another wrinkle to the already complex world of tech stocks.
