Are Elon Musk and Cathie Wood Correct About the Federal Reserve?

This year, some of the most prominent figures in tech, such as Elon Musk and Cathie Wood, have not been the most successful investors. However, as tech stocks are becoming more affordable, investors may want to consider taking some of their advice into account.

Mr. Musk and Ms. Wood have both expressed their concerns about the impact of rising interest rates on their investments. Ms. Wood wrote a letter to the Federal Reserve in October, cautioning them about the potential for a deflationary bust. Mr. Musk recently tweeted in response to an investor's complaint about Tesla's stock drop, blaming the Federal Reserve for the issue. He further explained that as the return on risk-free Treasurys increases, the value of owning more-risky equity assets decreases.

The poor performance of Ms. Wood's ETFs and Mr. Musk's largest asset cannot be solely attributed to the Federal Reserve. The ARK Innovation ETF ARKK has dropped by 0.47%.

The stock of major companies has seen a significant decrease this year, with a 69% drop for one and 68% for the other. The Nasdaq-100, a tech-heavy index that only includes nonfinancial companies, has experienced a much smaller decrease of 35%.

Recent evidence has demonstrated a negative correlation between the Nasdaq-100 and the average yield change of 10-year Treasury notes in 2021. This is in line with what is taught in business schools and accepted across Wall Street: the valuation of growth stocks is linked to their future earnings potential, and as yields increase, the present value of those future earnings is likely to decrease.

It is not always easy to predict the stock market's performance. Nasdaq Investment Intelligence discovered that the Nasdaq-100's performance has been linked to the yield on 10-year Treasurys over the past 30 years, except when interest rates reach a high level and continue to increase. This could be because when rates are rising, the economy is usually doing well. This implies that investors must pay attention to a variety of macroeconomic factors, not just interest rates.

As we anticipate another year of potentially increasing rates, some tech stocks appear to be ending the year at a very attractive price. Meta Platforms, the owner of Facebook, is currently trading at a price of 14 times its forward earnings, which is much lower than the average of 29 times over the past 9 and a half years. In order to adjust to the decreasing ad market, Meta has taken steps such as reducing its workforce by 13% and eliminating nonessential projects. JPMorgan recently upgraded Meta's stock to Overweight, citing a more favorable risk/reward ratio and valuation.

Stocks such as Amazon.com, Airbnb and DoorDash have not done as well as the broader indexes this year, even though the businesses as a whole are still expanding despite the pandemic.

For tech aficionados, these types of deals could appear to be a New York City penthouse going for less than $5 million or an Hermès Birkin bag for a "modest" thousand dollars.

Price alone should not be the sole factor when considering an investment. If the Federal Reserve decides to halt rate increases in the upcoming year, as many analysts anticipate, tech stocks may experience a surge. However, there are other economic elements that must be taken into consideration, contrary to the opinions of Mr. Musk and Ms. Wood.

Meta announced in October that it anticipates its most significant year-over-year revenue decrease in the fourth quarter, with a decrease of approximately 7% at the midpoint of its outlook. The company made it clear that some of its performance is contingent on the state of the overall economy. Specifically, the company highlighted that deteriorating foreign-exchange rates would have a negative effect on its revenue.

During its third-quarter conference call, Amazon made it clear that the economic climate would have a major impact on its fourth-quarter earnings. The company pointed out that inflation, increasing fuel and energy costs, and other factors were causing consumers to rethink their spending and businesses to reevaluate their technology and advertising investments.

In the last two years, investors have been penalized for not taking into account the underlying business performance of companies. In 2021, they could be reprimanded for not considering the broader context as well.