In the last decade, there has been no bad time investing in technology.
Since the financial crisis, tech stocks have outperformed other markets. Over the last five years, they have outperformed the market so much that they wonder if it’s worth investing in something else.
And it’s not just about being profitable. They were also resilient. After the COVID-19 shock, tech companies not only survived, but prospered amid the global economic downturn. Today, semiconductors have an overwhelming supply shortage, but stock prices are largely unaffected. It almost goes against logic.Investors don’t rush to buy BP and Exxon shares when there is no oil, but when Sony can’t make a PlayStation and Apple
Tech stocks are like Superman. Many can’t stop them. But Superman had kryptonite — the substance that caused him to lose all power. And tech has its own kryptonite.
Consider the following:
From August 4, 2020 to March 19, 2021, yields on 10-year US Treasuries rose from the lowest recovery rate of COVID-19 (about 0.513%) to 1.732%. During this period, tech and other growth stocks were quite strong, rising an average of 13.97%. So what is friction?
At the same time, value stocks (boring and old) rose 29.23%.
Take a closer look, and the trend is still there. By February 2, 2021, the 10-year yield had reached 1.107%.Growth stocks actually rose as they rose 56.45% in the next 6 weeks Recession—Down 3.9% — Value stocks gained 8.75%.
Interest rates and growth valuations are not 100% anti-correlated, but they are fairly close. Please choose your favorite example. You can still see it happening in near real time. From the 22nd to the 29th of last month, it increased by 1.304% to 1.510% in 10 years. Value stock stall: + 1.15%. Growth stock? -2.06%.
Why is this? Why are interest rate hikes disproportionately impacting growth areas like technology?
Now, when interest rates go up, it costs money to borrow. They make it less because companies have to pay more to fund new ventures. As growth slows, projected future earnings will recede. Investors are less optimistic and stock prices are falling.
The technology sector is particularly sensitive to this feedback loop. During the busy season, fast-growing companies may be willing to seize the opportunity for cutting-edge technologies that help improve efficiency and productivity. In contrast, stagnant and declining enterprises may find it easiest to reduce these costs.
Interestingly, at least in the short term, tech stocks are suffering, regardless of whether these scenarios actually work. Long before the earnings report is released, investors expect higher rates to slow things down, so they preemptively rotate their money from growing industries to more established industries. ..
In fact, you don’t even have to change interest rates to make investors react as if they were doing so. You can get along with just the rumor that change is coming.
Finally, keep in mind that interest rates not only lower the valuation of stocks, but also boost bond yields. Therefore, safe and predictable investments such as bonds and savings accounts become more attractive at the moment when growth stocks are at the highest risk. People move their money out of the market and trends are complicated.
Fortunately, kryptonite in this growth sector is rare in recent years. Prices are low and are skyrocketing here and there. This is part of why tech stocks have been so profitable these days.
But there are reasons to wonder about the future.
This summer, the Federal Reserve announced plans to roll back some of the monetary policy it enacted in response to the COVID-19 pandemic. Higher interest rates are now back at the table. On top of that, the Fed will soon begin to taper off, reducing the number of bonds it buys each month (which has the effect of increasing the yields of the rest of the people) and eventually selling the bonds it has accumulated over the past year and a half ( Again, raise yields).
Will tech stocks succumb to kryptonite again if the new Fed’s policies lead to higher interest rates?