Tackle Today: Why Rising Interest Rates is Poison for Tech Stocks | Tackle Trading: The #1 rated trading education platform

Tackle Today: Why Rising Interest Rates is Poison for Tech Stocks

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Curse you, Mister Ten Year. ≈

Traders,

Headline writers seeking a culprit for Tuesday’s tumble found an easy target with the ten-year yield. Its sudden rise in the wake of the Fed meeting made it the obvious choice for what was upsetting stock investors. Was I a news writer, I probably would have clung to the same narrative. Whether it really is bad for equities or traders were just looking for an excuse to sell is a mystery. Regardless, the ten-year yield did jump to its highest levels since June, hitting 1.56%.

As mentioned previously, rising rates help some stocks while hurting others. Optimists will argue that rates rise when the economy is growing. Thus, it’s a symptom of strength. Pessimists will contend that making money more expensive takes the punch bowl away from high-growth companies using cheap capital to fuel their expansion. This arguably is why tech companies have been hit hardest. The sector hosts some of the highest multiple stocks in the market.

It should be noted that the last tech tantrum in February and March (the Nasdaq got wrecked, remember?) occurred when the ten-year yield was zipping higher.

Best case scenario, we are in an adjustment period where stocks need some time to calibrate to a new, higher rate reality. We pull back 5% to 10%, shake out the weak hands, and find a bottom in time for a year-end rally.

Worst case scenario, inflation pressures get out of hand, the ten-year yield surges past the March high of 1.76%, and investors toss their cookies as we enter an unwelcome but ultimately short-lived bear market.

In either case, remember – this dip will be a buy. It’s never a matter of if, but when.


Chart of the Day

10-Year Chart

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If you want the stock cascade to cease, then root for the ten-year to take a chill pill. A pullback to 1.4% would do the trick. If you’re not already watching TNX, which tracks the ten-year yield but trades at 10x the price, then start doing so. The media has spoken, and yields are the current bogeyman du jour.   


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