Just as Wall Street is piling up, tech stocks face another rate storm: ‘If we hit 4%, the whole stock market will shift and recalibrate’
Jerome Powell’s latest hawkish missive threatens to open a new front in the never-ending battle between tech stocks and Treasury yields, which could hurt fund managers who have just plunged back into US megacaps en masse.
The Nasdaq 100 index posted its steepest drop since the week ending June 10 after the Federal Reserve chairman on Friday touted his steely resolve to raise interest rates in tight economic territory to cool the economy. inflation at decade highs.
Money managers, including long-term bulls on the sector, see the risk of further losses ahead for rate-sensitive tech stocks – as all signs suggest Powell will follow through on his policy threat given that prices goods and services are still stubbornly high across the globe.
A rapid rise in 10-year bond yields this month has already rattled so-called growth stocks while triggering a cross-selling of assets following the recent $7 trillion equities rebound.
Wall Street worries are now bracing for the benchmark Treasury index to retest the nearly 3.5% peak hit in June or rise further to 4% – threatening further damage to blue chip companies after the group rebounded more than 20% from the bear market nadir.
“If yields go back up to 3.5%, it will shake up markets and be particularly painful for tech stocks,” said Nancy Tengler, chief investment officer of Laffer Tengler Investments. “If we hit 4%, the whole stock market will change and recalibrate.”
All of this threatens to catch hedge funds off guard after the industry data cohort tracked by Goldman Sachs Group Inc. raised tech bets in the last quarter to the highest since the start of the pandemic, convinced that a slowdown impending economic would kick-start megacap security trading.
Another wave of volatility rocked Wall Street on Friday, after Powell jawed at the Jackson Hole symposium as he warned of restrictive policy “for a while” given history “strongly warns against a premature relaxation of the policy”. Futures referencing the Fed’s monetary policy meeting in September priced 64 basis points of tightening at one point on Friday, down from 59 basis points before the speech. But the stock market took the brunt of Powell’s message that interest rate hikes could undermine economic growth as the tech-heavy Nasdaq 100 fell 4.1% even as the yield hit 10 years has remained broadly stable.
Generally speaking, technology companies are particularly sensitive to fears of rising interest rates, as many of them are valued on the basis of projected earnings in the coming years. The present value of these future benefits is worth less as returns increase.
Rising interest rates also make financing transactions more expensive. That’s no problem for companies like Apple Inc. and Microsoft Corp. that have cash, but this increases the risks for start-ups that burn cash in pursuit of rapid growth.
The 10-year US Treasury yield hovered around 3% on Friday, down from around 2.57% in early August.
“Investors are yearning for an accommodative pivot, but they won’t get it until inflation comes down – it’s certainly peaked, but it needs to come down significantly,” said Sean Sun, portfolio manager at Thornburg Investment Management. “If it takes the Fed to raise rates even more aggressively to get there, then we could see the 10-year return to around 3.5%. This transition will not be painless for tech stocks.”
Long-term oriented fund managers are notoriously reluctant to offload tech exposures due to the cohort’s reliable earnings generation, healthy balance sheets and ability to ride out disinflationary trends.
For investors looking to maintain exposure to technology companies, Sun recommends clients buy stocks of IT services companies, while avoiding longer-term unprofitable stocks like software start-ups.
Tengler at Laffer Tengler sees the tech pain in the near term, though she favors the cohort over the next three to five years. It sticks to cybersecurity stocks and companies that invest in cloud services like Amazon.com Inc., Microsoft and Google parent company Alphabet Inc., while avoiding struggling social media companies like the parent company. from Facebook, Meta Platforms Inc.
Meanwhile, electronics prices in the Adobe Digital Price Index, an alternative measure of consumer price trends, fell 9.3% in August from a year ago, which could help signal lower inflation in the months ahead, according to Jim Paulsen, chief investment strategist at The Leuthold Group.
This is one of the reasons he is a bull on the sector.
“The real question for longer-term investors is are we in the 1970s, where we have permanently higher inflation for longer? If so, then you don’t want stocks technologies,” Paulsen said in an interview. “Or is this just a cyclical spike in inflation?
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