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Friday, September 16, 2022
Today's newsletter is by Julie Hyman, anchor and correspondent at Yahoo Finance. Follow Julie on Twitter @juleshyman.
Another day, another tumble in tech stocks.
The disproportionate shellacking the sector has suffered recently has raised questions about why, exactly, technology is seemingly so vulnerable to rising interest rates.
The answer? Rate hikes are far from tech's only problem.
Traditionally, rising rate periods have implications for many sectors — not just tech. When rates go up, it costs more for companies to borrow money to finance their businesses. It can also mean consumers have less disposable income because they, too, are paying more for mortgages and cars and credit cards. That latter point is especially pertinent now. Not only are homebuyers paying more than 6% interest for a 30-year mortgage for the first time since 2008 — they’re doing it while paying 13.5% more for groceries than a year ago.
In other words, we’re seeing the double whammy of inflation and rising interest rates. While the Federal Reserve has been raising rates to tamp down on inflation, the central bank still has a long way to go. Data released on Tuesday revealed that inflation remains high at 8.3%, though it moderated slightly in August.
Of course, this environment has taken its toll on the broader market. The S&P 500 has fallen 17% this year, beginning its decline before the Federal Reserve began raising interest rates on March 16.
Still, tech has gotten slammed harder. The S&P Info Tech Index — whose members include tech giants such as Apple (AAPL) and Microsoft (MSFT) — has fallen 25% this year. The Communications Services group, with Netflix (NFLX) and Apple (AAPL), has fallen even further — by 33%.
Let’s leave aside the modeling and nitty-gritty calculation of higher financing costs and whether Netflix is paying more to service its debt than energy companies (the best S&P 500 performers this year).
Some of tech’s underperformance might come down to vibe. Speaking to Yahoo Finance's Brian Sozzi this week, Goldman Sachs Managing Director Eric Sheridan pointed out that tech is an inherently risky sector — and right now, investors crave safety because they're uncertain of the Fed's next moves.
“At the end of the day, what tech investors want is visibility into a calm economic environment,” Goldman Sachs Managing Director Eric Sheridan told our Brian Sozzi at his firm’s tech conference this week. In order for tech stocks to do well, he added, “You really need a stable macro environment where people feel comfortable putting more risk back on in their portfolio.”