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Megacap tech stocks have been on a roll. Why they could thrive even if interest rates turn higher again. – MarketWatch

The megacap technology stocks have been outperforming the broader market of late. The NYSE FANG+ index NYFANG, -0.93% — which includes Facebook FB, -0.91%, Alphabet GOOGL, -0.96%, Amazon AMZN, -1.37% and Apple AAPL, -0.45% — has climbed 5% over the last month, compared with just 1% growth for the equal-weighted S&P 500 SP500EW, -0.26%.

Given the relief in bond yields, that makes intuitive sense. Tech stocks struggled when the yield on the 10-year Treasury TMUBMUSD10Y, 1.320% rose as high as 1.75%, which by Thursday’s close had fallen down to 1.30%. The knee-jerk expectation in markets is that when interest rates rise, tech stocks fall, and vice versa.

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, -0.33% rose, on average, 10.8% when bond yields fell, and rose 12.2% when bond yields rose. Even separating out periods by quintiles when yields rose the most, the S&P 500 still gained 9%, on average. The relationship, or non-relationship as it were, also held outside the U.S., though it covered a shorter time period.

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.

Moderna MRNA, +5.28% jumped 8% in premarket trade on the news the vaccine-making biotech will be included in the S&P 500.

Intel INTC, -1.26% is in talks to buy GlobalFoundries from Mubadala Investment at a valuation of about $30 billion, according to The Wall Street Journal. A deal would boost Intel’s efforts to compete with Taiwan Semiconductor Manufacturing TSM, -5.51% in making microchips for other companies.

Aluminum producer Alcoa AA, -1.71% reported stronger-than-forecast earnings and boosted its shipment forecast.

Didi Global DIDI, -2.06% may see pressure, after China sent regulators to the ride-hailing business, further escalating pressure on the company after its U.S. initial public offering.

Floods in Germany and Belgium have led to at least 100 deaths, authorities said on Friday.

The markets

U.S. stock futures ES00, +0.23% NQ00, +0.28% edged higher ahead of the retail sales report. The yield on the 10-year Treasury TMUBMUSD10Y, 1.320% also nudged higher, to 1.32%.

The chart

When is the best time to buy bitcoin BTCUSD, -1.18% ? According to DataTrek Research, when volatility is low. “Buying during periods of low volatility (between 2% and 3%, ideally towards the low end of that range) tends to yield positive future returns. The notable exceptions (September 2014, November 2018) came after especially large rallies (November 2013, December 2017) which took longer to burn off,” it said, referring to 100-day periods for volatility.

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