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Weekly newsletter |26 February 2021| Tech stocks crumble

Aarinder Lidder - Feb 27, 2021

Welcome to our weekly newsletter, where I discuss what's been going on in investment markets. Last week my newsletter was about the bond market buckling. What we've seen this week is a continuation of that pattern and the impact that's now having on equity markets more widely. If you want to find out what's been going on with bond markets and why, go back and read last week's newsletter. This can be viewed on  There's a lot of content in my newsletter and I explained what's going on in terms of mechanics.

Fast forwarding now to this week, what we've seen in equity markets is key areas showing some real signs of weakness. We've seen a pullback particularly in technology stocks, which I will discuss further . The pullback has spread into the wider market. If you look at the S&P 500 for example in the last week, it's down around about 1.5%.

The more speculative areas of equity markets have seen a real pull back. Tesla for example is down around about 18%. We've seen other areas of investment markets, more generally that are more speculative pullback, as people start to become a little bit more risk averse. A good example of that is Bitcoin. The price of Bitcoin had fall by about 20% at its worst point in the last week.

If you look at the wider equity markets, the Japanese stock market is down around about 1%. US equity markets specifically the S&P500 were down around about 1.5%. The Nasdaq 100 which is the tech heavy index in America is down around about 3.5%. Asian equity markets are down around about 3%. Emerging markets were in that mix as well, they were down around about 3%. If you look at that broad range, you can see there's been a bit of a risk of element to markets.

We're seeing a bit of a rotation, something like we saw back in November when we had the vaccine first announced. We saw a rotation into those value plays out of growth stocks. We’re seeing that happen once again. Any value exposure in your portfolio’s would have done particularly well this week, in comparison to growth stocks like technology stocks in the last week.

Part of that is due to the re-opening we are hoping for in economies around the world. In Europe for example, they have got this road map to freedom and it means that the Euro and Pound has rallied off the back of that.

So why have technology stocks been hit? It goes back to the rising yields that we're seeing now. Yields are still increasing from last week. We've had the US 10-year Treasury yield, go up to about 1.39%. The rising yield environment is not great for technology stocks now.

The narrative is because a value of a share of any company is effectively a discount of future earnings and the rate at which you discount those future earnings matters. With tech stocks, the earnings of the potential profits are quite a way off in the distance. If you discount those back and if rates are rising to, and you expect it to be higher in the future that means that the price you're willing to pay for those future earnings will be lower.

People were talking about them being over valued but when rates start to rise then the price, they would be willing to pay for this future earnings starts to fall which means that the share price will start to fall. This is why we've seen this collapse in technology stocks this week.

If you've been exposed to commodities for example, commodities as a broad index are reaching an 8 year high because of inflation expectations that are now out there.

Where will all this stop? People will be looking at the rising yields which are continuing to push higher, and technology stocks have taken a hit. Bitcoin has taken a hit. The more speculative areas of the markets start to fall when it starts to have a knock-on effect to things like the S&P 500.

In dollar terms it's not down by that much but, if technology stocks keep unravelling then because of their size and influence on the wider market, it will start to have an impact. We've already seen technology stocks in China take a hit off the back of what's going on in the US.

Where will this end up? will it keep going? The answer to that will depend a lot on central banks. This week Jerome Powell was giving testimony to Congress in which he stated that he didn't expect inflation to prove a problem in the short term. It would probably be transient so we would see inflation pick up, commodity prices are rising after all. Ultimately it wouldn't cause the US Federal Reserve to have to act and raise interest rates which is what people are really worried about now. He said that he would probably end up keeping rates lower for longer and supporting the economy.

Going back and looking at history, when we've had periods where yields rise very quickly in bond markets, we have seen bond markets or government debt in particular sell off aggressively. Where that's kept going and it's caused a wider equity market collapse has been when it's been due to say the US Federal Reserve or other global central banks saying that they're going to start unwinding QE or raising interest rates.

That causes the market to panic. We had an example that's been called the taper tantrum in 2013, where at that point the federal reserve said they were looking to perhaps start raising interest rates. It caused a big wobble in bond markets and equity markets. It was because of that expectation that the central banks would pull the rug away from markets. Markets have been driving since 2009 largely from central banks liquidity measures and them pumping monies into the market.

At the moment it doesn't seem like we’re at that stage, so perhaps in the next days and weeks things will start to settle down, after Jerome Powell's comments the market did rebound on the day. We have seen some signs of stability returning to bond markets and equity markets, in particular technology stocks started to calm down a bit but we're not out the Woods just yet.

If you look at the 10-year US Treasury yields, were hitting a level which would be called resistance where it's a significant level where we are around about 1.4%. If the market pushes above that, the yields crash through that then we could go much higher, but the likelihood is that the resistance level will prove difficult to breakthrough. If we don't then markets could reverse, or we could see the yields fall which would also cause the 10-year US Treasury to rise. Equity markets could also take positive news from that and start to rise to and see technology stocks rebound.

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