When interest rates rise quickly, it puts pressure on the stocks of technology behemoths, which have been driving major indices higher for years. This puts investors’ faith in some of the most popular stock market trades to the test.
This week, Microsoft Corp., Alphabet Inc.’s parent company Google, and chipmaker Nvidia all saw their shares fall by at least 5%, weighing on major indexes and equity funds that give large market capitalization companies more clout. According to Dow Jones Market Data, the seven companies mentioned above, as well as Apple Inc., Amazon.com Inc., Facebook, and Netflix Inc., lost a total of $315 billion in market value on Tuesday; this is the largest drop since last October for the seven companies mentioned above, as well as Apple Inc., Amazon.com Inc., Facebook, and Netflix Inc. Despite a 0.2 percent gain on Wednesday, the S&P 500 is still down 3.6 percent year to date.
The yield on the benchmark 10-year US Treasury note has risen above 1.5 percent, with long-term Treasury yields surging at their fastest pace in months. Recently, there has been a reversal. Bond prices fall, causing yields to rise, which affects everything from mortgage rates to auto loan rates. Technology companies are less appealing because the 10-year yield has been this high for three months.
Large tech companies that are expected to generate massive profits in the future but have low yields today are attracting investors willing to pay a premium for them. During times of global growth, investor optimism about the economy helps yields rise, which in turn helps a company’s stock price and increases shareholder returns. Investing in cyclical stocks has the potential to save you money.
During the week ending September 22, investors withdrew $1.2 billion from technology mutual and exchange-traded funds
according to Bank of America data provider EPFR Global. This was the first outflow in approximately three months. During that week, US stock fund investors withdrew nearly $29 billion, the largest outflow in over 312 years, bringing an end to a period of consistent inflows.
Although the most recent swings in yields and tech stocks are only temporary, investors are concerned about rising interest rates, as they have been in recent months. Following the Federal Reserve’s November announcement that it may begin tapering bond purchases and raising interest rates in 2022, recent bets have been placed on improving economic data and rising inflation. According to some analysts, the coronavirus and supply chain disruptions could cause inflation and interest rates to rise even further.
Previous predictions that yields would remain low and the market value of technology leaders would rise in the future have been shattered by a rise in yields. As bond yields rose early in the year, investors favored economically sensitive stocks, then poured tens of billions of dollars into tech funds as the so-called reopening trade faded this summer. Investors favored Analysts say that investors who recently purchased tech stocks are being forced to reconsider their decisions.
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