Yield Smackdown 🥊
You may have noticed that your stocks are declining, especially those in the tech sector. The entire NASDAQ has been hit hard, declining over 3% in the past month, with most of the blue-chip tech stocks that are normally strong losing their ground. Those with growth based and more aggressive investing strategies are feeling this the most, a good reminder as to why diversification is so important. But why is this happening? Well, there are many reasons, but the primary reason seems to have to do with bond yields. Let’s break it down from the basics to really understand what this means.
When an economy experiences high growth, demand rises faster than supply leaving firms with supply constraints and thus pushing up prices or in other words, causing inflation. Because the stock market is a reflection current investor sentiment and current sentiment is based on what investors think will happen in the future, a strong 2021 covid recovery (which most investors seem to believe will occur) hints at inflation. When inflation occurs, bond investors demand a higher return (also known as yield) to compensate for inflation risk. Higher yields make stocks look less attractive, especially those in the tech sector which are less contingent on stronger economic conditions to find growth. In short, the current rise in yields caused by increasing investor confidence has triggered a rotation away from last year’s winners like tech stocks, to bonds, as well as other cyclical shares like financials and resources that will benefit from stronger economic conditions.
All in all, despite the current pullbacks, experts such as BlackRock’s chief bond strategist Scott Thiel have said “We don’t believe that markets are dramatically overvalued at this point,” he says, adding that there’s “a lot of economic growth coming.”
Do you agree with Thiel? Or do you think this trend will continue?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.