Top-flight U.S. tech stocks suffer a sharp reversal in Fed rate fears



Investors this week deserted a trade that has produced big returns since the financial crisis, ditching stocks of fast-growing tech companies in favor of stable ones that had been largely overlooked by Wall Street.

The tech-focused Nasdaq Composite fell 4.5% in the first five trading days of 2022, the worst year-on-year start since fears of a slowdown in China sent shockwaves through financial markets global six years ago.

The tech crash came as U.S. government bond yields rose the most in 28 months, as concerns mounted that the Federal Reserve would need to hike rates more aggressively than expected to bring hot inflation under control. .

“A lot of the air has been released,” said Jurrien Timmer, head of global macro strategy at Fidelity Investments. “[Speculative tech shares] went to the moon and now that tide of liquidity is reversing.

Technology stocks, especially those of fast-growing, loss-making companies whose high prices are based on the potential for windfall future earnings, are considered particularly sensitive to rate hikes that lower those potential future returns. More importantly, this week, the sale extended to big names in technology that are among the most important of the benchmark US stock indexes, including Apple and Alphabet, owner of Google.

The 10-year US Treasury yield – a crucial benchmark for global assets – fell from just 1.51% at the end of 2021 to a high of 1.8%, eclipsing a post-pandemic peak reached in March.

“A lot of bond players went on vacation in mid-December, with Omicron still an unknown amount,” said Ludovic Colin, portfolio manager at Vontobel Asset Management. “They came back in January realizing it might not be that bad. . . This is why we have seen yields plummet.

As fear of Omicron’s gravity fades in the markets, Fed policy has come to the fore. Before the end of 2021, the world’s largest central bank had already signaled it would begin to remove crisis-era political support – built deep in the coronavirus downturn – more quickly, ushering in a new cycle of interest rate hikes this year.

Line graph of the 10-year U.S. Treasury yield (%) showing Treasuries sold off significantly, hitting other markets

This week, investors took a closer look at the discussions that took place within the Fed in December. The minutes of the last Federal Open Market Committee meeting showed that policymakers may find reasons to accelerate the pace of rate hikes. It may even start to shrink the size of its balance sheet this year, which has doubled to nearly $ 9 billion since early 2020 thanks to the massive central bank bond-buying program that has helped support financial markets. .

“The fact that they are talking about the balance sheet is very significant,” said Mohammed Kazmi, portfolio manager at Union Bancaire Privée.

Conviction over the rate hike solidified on Friday as the U.S. unemployment rate fell below 4% for the first time since the pandemic was first reported on U.S. shores in 2020, with signs of wage inflation in the labor market.

Line graph of US interest rates involved in Sofr futures trading (%) showing traders are betting the Fed will tighten policy in the coming years

As yields rose, so did the fortunes of previously unloved value stocks, as investors turned away from high-growth companies that were trending during the height of the pandemic. Shares of banks, oil majors, large industrial groups and especially companies whose fate is closely tied to the reopening of the US economy, including airlines and mall operators, all rose.

Value stocks managed to make a gain in the first week of 2022 when the S&P 500 fell 1.9%. A sign of the strength of the market movement, the Russell 1000 Stock Index outperformed its growth counterpart by more than 5 percentage points this year, the most in the comparable period on records dating back to 1991, according to Bloomberg data.

Year-to-date (%) line graph showing top-flight US tech stocks hit by fierce rotation

The fallow start to growth was particularly painful for funds invested in riskier sectors of the $ 53 billion U.S. stock market. Shares of loss-making tech companies have already fallen about a tenth this year, while recent initial public offerings are down 12%, according to closely-watched indices compiled by Goldman Sachs. The bank estimates that companies that generated strong growth despite the ups and downs of the US economy fell more than 8%.

Timmer of Fidelity Investments said this type of rotation is a “familiar story”.

“It happened in the late 1960s with speculation on space and technology stocks. It happened in 2000. . . and generally the Fed plays a role because it is this segment of the market that suffers, ”he said.

One of the reasons the market movement has been so intense is that many mutual funds and hedge funds held concentrated positions in many of the same companies, analysts said.

“You have everyone trying to get out at the same time,” said the head of equity operations at a New York-based bank. “Normally in a healthy market, when hedge funds unwind, mutual funds try to come in and buy weakness and that has the effect of stabilizing. But now . . . when hedge funds and pension funds start reducing risk, mutual funds are moving in the same direction.

The rotation has also been confusing at times, with competing forces pushing and pulling investors in opposite directions and blurring the narrative of market movements. And investors have tasted short-lived value equity rallies before, including at some point last year.

Line graph of the Russell 1000 Value Index divided by the Russell 1000 Growth Index showing After trailing for years, US value stocks are starting to recover

It points to a bumpy road ahead, with rate hikes and cuts colliding with concomitant threats from coronavirus to the economy.

“While I think the market can and will rise, investors will need to manage these rotations,” said Russ Koesterich, portfolio manager at BlackRock. “Investors are partially pulling their queue from the bond market and the part of the market most sensitive to these rate moves are the speculative tech names.”


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