Tech Stocks Face Declines After Central Bank Interest Rate Hike Worries

By Bryan Jung
Bryan Jung
Bryan Jung
Bryan S. Jung is a native and resident of New York City with a background in politics and the legal industry. He graduated from Binghamton University.
January 19, 2022Updated: January 19, 2022

Big tech stocks faced a sea of red on Jan. 18, after rising high during the pandemic, as investors pull back after reports of interest rate hikes this year from central banks.

The downturn is being blamed on surging bond yields as investors prepare for the curtailment of Federal Reserve stimulus.

High growth firms saw their Nasdaq futures tumble as much as 2 percent, as tech stocks lead declines in Europe.

Tech stocks had largely benefitted from a low-interest-rate environment, but have started to feel the pressure after the Fed has signaled that it would reverse rate policy in 2022, after already slowing bond purchases in December.

A rise in two-year U.S. Treasury yields reflected ramped-up bets for a U.S. policy rate hike as early as March, as the Fed tackles the strongest inflation since the 1980s.

Investors are watching the next Fed meeting on Jan. 25-26, as the policymakers signaled they would start raising interest rates to curb inflation, which rose 7 percent last month from a year earlier in the fastest pace in almost 40 years.

Tech giants’ explosive growth has helped fuel the S&P’s meteoric rise over the past decade.

Since their earnings were considered less sensitive to economic fluctuations, tech stocks had acted as a haven for investors amid pandemic worries, as many companies in the tech sector also benefited from the stay-at-home trend of the last two years.

However, some investors now worry that big tech stocks will have difficulty delivering big gains this year in the face of stretched valuations, expectations of higher Treasury yields, and a more hawkish Fed.

Investors with combined assets under management of more than $1.2 trillion showed fund managers have cut their overweight positions to their lowest levels since December 2008, according to a Bank of America survey.

The top three crowded trades were long technology stocks, short U.S. Treasuries, and short Chinese stocks, according to BoA.

Another survey conducted by Deutsche Bank, showed an overwhelming majority of respondents believing that U.S. technology shares are in bubble territory as investors remain bearish on hawkish central bank policy moves and higher yields.

In expectation that central bank rate hikes will be likely this year, investors are ramping up their positions in equities, particularly in Europe, such as cyclical banks, commodities and industrials, which tend to benefit from higher rates.

Investors are now bullish on banks, oil, commodities, and materials, and less so on technology, emerging markets, and bonds.

At closing, the Dow Jones Industrial Average slid 0.96 percent, the S&P 500 fell 0.97 percent, and the Nasdaq Composite slipped 1.15 percent to close almost 10 percent below its record closing high on Nov. 19.