The megacap technology stocks have been outperforming the broader market of late. The NYSE FANG+ index NYFANG,
Given the relief in bond yields, that makes intuitive sense. Tech stocks struggled when the yield on the 10-year Treasury TMUBMUSD10Y,
There are two reasons why that relationship should hold. The first is simply that higher interest rates choke off economic growth, raising the cost of borrowing for consumers and businesses alike. The second is that, if a stock is the sum of its discounted future cash flows, then those flows are worth less, as the rate at which they are discounted increases. For growth stocks in the technology sector that are banking on future profits more than current ones, a higher discount rate is bad news.
The thing is, that relationship, while sounding logical, isn’t borne out by historical data. Andrew Berkin studied the relationship for a paper, “What Happens to Stocks when Interest Rates Rise.” Looking at 90 years of data, the S&P 500 SPX,
To Chadd Knights, a portfolio manager for Australia’s Duro Capital who cited the paper in an investment letter, rising rates shouldn’t really affect the investment process. According to Knights, Berkin also confirmed that growth stocks in particular aren’t negatively affected by higher interest rates.
“The reality is that most of us haven’t experienced sustained rising interest rates in the past. No one knows how people will react. And indeed, shares may fall on the back of a rising rate environment, even if the history suggests otherwise. But what this paper shows us is that that is not necessarily the case, which is what is to be construed if you read any of the popular financial news outlets,” Knights said.
Retail sales data on tap
Key data are on tap with the U.S. retail sales report for June, and shortly after the open, the University of Michigan’s consumer-sentiment report, with the latter also eyed for the reading on consumer inflation expectations.
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