Shares in US tech stock suffered a calamitous day on the markets amid fears that an incoming interest rate rise would trigger a mass sell-off of bonds. This came after Wednesday’s meeting minutes from the Federal Reserve indicated that there might be a faster pullback on government aid. As such, the tech-heavy NASDAQ index closed down 3.3% to mark its worst day since February 2021.
Hedge funds were clearly unsettled following the news from the Fed and the biggest tech selling in a decade spread into broader markets. It comes at a time when investors are starting to see what 2022 could hold once the disruption caused by the Omicron variant of the Covid-19 virus has passed. With three planned interest rate rises in 2022 along with the threat of rising inflation rates, it means that speculative assets such as technology stocks will start to look much less attractive.
Much will depend on how the Fed responds to the jobs numbers that were revealed this week. It was thought that if employment figures aren’t recovering as well as expected, then the Fed might delay its move to raise interest rates. However, it seems that the economy is still recovering and that jobs numbers will continue to improve. This means that an interest rate increase could come sooner than anticipated and tech stocks will lose their appeal.
Technology stocks have been hugely popular in the past couple of years. Much of this has been due to the effect that the Covid-19 pandemic had on the economy. With banks being forced to reduce interest rates, it mean that the yields from government bonds gave very little in return. As such, the cheaper borrowing rates meant that so-called big tech stocks like Apple, Amazon, Alphabet and Tesla looked much more attractive in the current climate.
However, with the US economy now looking to be getting back on track after the pandemic, it looks like the pendulum is swinging in the other direction. With skyrocketing inflation, the Fed has had no option but to raise interest rates this year to stop the economy from overheating. The rise in interest rates will deliver higher bond yields, but do little favors for technology companies.
This is because tech brands like Netflix are notorious for spending a lot of money while bringing in very little in the way of actual profits. As such, the immediate returns for investing in tech stocks will be much less compared to the more reliable bond yields.
Above all, a stronger economy means that investors will be returning to the stocks that suffered most when the pandemic first emerged. As such, anything from airline stock to shares in hospitality companies will be expected serve up better yields compared to technology shares. So while we can still expect big things from the big tech companies, 2022 might not be such a spectacular year.
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