I’ve said time and again that one of the biggest near- and long-term risks to an expensive growth sector is interest rates. When the candy is taken from the baby, we should expect to hear some crying. Over the last couple weeks, growth stocks (mostly tech) have been weeping, and we see it as a proper reaction to the swift rise in longer interest rates (10+ year Treasurys). With the irrational exuberance in the markets most obviously depicted by novice traders taking advice from Reddit posters, numerous SPAC (special purpose acquisition company) IPOs, extreme equity valuations, we felt the time was right for things to take a breather. Unbeknownst to many new retail traders driving this sentiment, trees do not grow to the sky.
What we are seeing right now is more of a reversion to the mean as it relates to rates. Pre-Covid, interest rates were trading even higher than they are now (call it about 1.90%), and the market was surging in just about every sector, especially growth stocks. The difference between pre-Covid era and now is the amount of stimulus that has been injected into the economy, and the potential inflation that could come with it. Rising rates, in general, is seen as supportive for a growing economy. The Fed is quite conscious about this, and I’ve continued to communicate to clients that we must watch the Fed and what they are keying in on. For now, they are staying accommodative and even Treasury Secretary (Former Fed Chair) is bullish on more stimulus. The Fed has tools at their disposal to help keep long rates lower, as this is in the best interest of a recovering economy as well as in US debt servicing costs. This move is commonly referred to as Operation Twist, where the Fed expands purchases of longer maturity debt (4+ years) and sells short term debt to flatten out the curve by bringing short rates higher. I believe, technically speaking, that the swift movement of rates to where they are was the catalyzing factor to the market correction. Once rates settle out and the market washes out the weak hands, we should be back on track with the rally. With that said, I think it will take more time for the market to turn back around. One of our quants sold out of the market early this week, so far proving to be a very prudent move. Macroeconic factors look very good coming out of the pandemic, and the thesis for many growth stocks has not changed. We are currently assembling our ‘wish list’ for stocks to buy, expecting greener pastures ahead.
KL Wealth Advisors 