Tech stocks yield to bonds
Are the days of simply loading money into stock market top tech stocks, regardless of valuation, finally coming to an end? The U.S. tech rout witnessed yesterday, Thursday 25th February, seemed to suggest this is the case. The Nasdaq experienced its biggest one day loss since October 2020.
Yields
The U.S. ten year Treasury yields in February 2021 have moved from 1.13% to a high as 1.61%, a rise of 48 basis points, the highest level in a year. This move has occurred way ahead of most predictions.
Note: One basis point = 0.01%.
Bond investors are becoming worried about the potential for inflation
Fear of inflation is causing investors to speculate the Federal Reserve may have to amend policy sooner rather than later as indicated. The Fed will have to either reduce bond purchases or even raise rates. That would be a negative for stocks. The Dow dropped 559 points on Thursday as tech stocks suffered a 4% drop in a fast sell-off.
Stocks on edge
As stock prices are so high, there is no room for error. Small shifts in yields could cause tech investors, in particular to take profits, under the assumption that this is as good as it gets right now.
There are alternative opportunities out there, and investors now need to adapt to this. Other opportunities are available to investors such underperforming stocks and more attractive bonds.
I believe we are witnessing a change in the economic backdrop and it has arrived sooner than expected. A strong economic rebound is forming and is creating a shift in investors attitudes, actually it’s forcing a change.
Rising interest rates and higher inflation are on the way.
Prepare your investments.