HomeStockRising rates could dampen tech and growth stocks

Rising rates could dampen tech and growth stocks

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, Monday, Jan. 3, 2022.

Michael Nagel | Bloomberg | Getty Images

Rising bond yields could temporarily dampen tech and growth stocks as investors bet the Federal Reserve will raise interest rates four or more times this year.

Stocks tumbled on Monday, with technology stocks the worst-performing sector as U.S. Treasury yields soared.The Nasdaq was battered, down 2.1%, while S&P 500 It was down about 1.7% in midday trade.

This 10-year yieldContrary to price action, it hit a new post-pandemic high of 1.86% on Monday after trading just below 1.8% on Friday.This 2 year yield Also pulled higher, more than 1% to 1.04%. For perspective, the 2-year rate, which best reflects Fed policy, was just above 0.5% in early December.

“I think a lot of that is because people are starting to get more aggressive in their calls to the Fed,” said Jim Caron, head of global fixed income macro strategy at Morgan Stanley Investment Management. “It’s two rate hikes, then It was three times, now it is four times, and probably more than four times.”

Bond professionals expect yields to continue rising ahead of the Fed’s Jan. 25-26 meeting, before taking cues from the Fed’s tone. That could mean a plunge in stocks. Yields rose as prices fell, while bonds were selling off as investors repositioned ahead of the Fed meeting.

Caron said the market was full of hawkish talk, such as whether the Fed might surprise with a rate hike in January, or whether it would raise rates by 0.5 percentage point in March instead of the 25 percentage point most expected. “The stakes are going up, and the stock market isn’t that well-received as people start talking and talking about these things,” he said.

He said the fed funds futures market is pricing in four quarters of rate hikes in 2022, with the possibility of more than 25 basis points in March. A rate hike in January is also unlikely.

The Fed had set a hawkish tone when it met in December, but the minutes of that meeting showed central bankers were more inclined to tighten policy. Minutes of the meeting showed that Fed officials had discussed shrinking the balance sheet starting this year. This is in addition to the three quarterly rate hikes included in its forecast.

But a Fed spokesman also added to speculation that more rate hikes are on the horizon. St. Louis Fed President Bullard said last week He could see four rate hikes this year. Fed Governor Christopher Waller Friday Said three rate hikes would be a good benchmark, but could be fewer, or as many as five, depending on the course of inflation.

Bond strategists expect the closely watched 10-year yield to rise quickly to 2%. 10 years is important because it affects home mortgage rates and other business and consumer loans.

It’s also the stock market’s most-watched bond barometer, and its moves could affect tech stocks and other highly valued stocks based on expectations of their best future earnings.

“How quickly we can get to 2% will depend on the tone of the Fed next week,” said Ian Lyngen, head of U.S. rates strategy at BMO. “It’s going to depend on how risky assets perform. I expect us to be in January-March. Topped 2% during the Fed meeting. The market has entered the year and there is enough momentum to get us there sooner.”

Lingen then expects the rise in yields to slow, with the 10-year peaking in the first half of the year. Between 2% and 2.25%, bargain hunters should step in and slow the advance.

Caron said the stock market is jittery about the rapid rate swings, and investors are now unsure how fast rates will rise and where they will stop. Therefore, the Fed meeting in January will be very important.

“That’s where the Fed is going to have to communicate their game. I think at the Jan. 26 meeting, they signaled they were going to raise rates in March, and they also raised some questions about quantitative tightening and balance sheet shrinking. ,” said Cuaron. “Every now and then, why get in the way?”

As for stocks, “I think it’s going to be tough, but I think eventually people will see it and say what it really means. I don’t think it matters,” said Steve Massocca of Wedbush Securities. “The interest rate issue could be a good thing. We’ve turned the tap too hot. Turning it down will be good for the stock market in the end.”

Volatility will erode some momentum in tech and high-growth stocks, which are high-value investments that do well when money is cheap, Masocca said.For example, former Goofy Ark Innovations ETF It fell 2.2% on Monday and is now down 17% in January.

“Is this going to be the source of the big drop in the stock market? I don’t think it’s true. It’s going to be choppy and people are going to be nervous about it,” he said. “These hyper-growth stocks, the FANGs of the world, those are overvalued. It’s probably a reassessment of some of those valuations. That’s ultimately a good thing for the stock market.”

Masocca said he expects value stocks to outperform. Among major sectors, energy was the best performer on Monday, trading flat.Houthi rebels attack United Arab Emirates Pushing oil prices to a 7-year high.

Rising oil prices added to a rise in global bond yields as investors focused on the prospect of rising energy inflation. For example, the 10-year German Bund yield edged up to near zero at -0.02%.

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