Big tech’s market-leading days can be counted on thanks to Federal Reserve Chairman Jerome Powell.
The Nasdaq 100 fell as much as 2.8% on Thursday, dragged down by a decline in megacaps technology stocks that have driven this year’s rebound. The picture came after Fed decision-makers promised to keep interest rates low until inflation exceeds 2% on average, while not giving any new details about the central bank’s bond buying plans.
The lack of commitment to quantitative easing sent a shudder through technical stocks, which have benefited greatly from bottom interest rates in addition to the pandemic̵
“Yesterday’s meeting, however, did not fully support the risks, as guidance on QE was weak,” Dennis DeBusschere, an strategist at Evercore ISI, wrote in a statement Thursday. “Investors expected a policy package that strongly anchored the entire yield curve, but got one designed to strengthen the curve.”
The sale extended the Nasdaq 100’s September losses, with the meter on its way to its first monthly decline since March. The yield on 10-year government bonds was about a basis lower, when traders entered buy dip after Wednesday’s bond route.
The Fed’s oft-repeated commitment to keeping monetary policy loose amid historically low government interest rates has helped tech bulls remove dot-com comparisons. At the height of the bubble in 2000, reference rates were close to 6.8%. They are currently around 0.68%.
“Although the current rally in technology stocks is often compared to the dot-com era, there is a striking difference,” wrote Jim Paulsen, chief investment strategist at Leuthold Group, in a statement Thursday. “Today, the continued overperformance of technology stocks is chronically strengthened by returns.”
That calculation could be improved if the Fed managed to squeeze price pressure, which has consistently not met the central bank’s target of 2%. Fed presented a new long-term policy framework last month that would allow inflation to shoot over, in an attempt to compensate for past disappointments. Political decision-makers signaled this week that they would keep prices close to zero for the next three years to achieve that goal.
An increase in inflation and longer-dated returns may prove toxic to technology. The sector is generally considered to be sustainability sensitive, given that the rapidly expanding companies that populate it tend to borrow cash to stimulate growth and their high – profit forecasts are expected over long periods of time.
But a long-term rise in government interest rates could lead investors’ cash to more valued companies, according to JP Morgan Asset management.
“The ten-year Treasury is doing a lot of things, a lot of it coming down to something of a durability in technology,” said Phil Camporeale, CEO of multi-asset solutions at the company. “If you could have an environment where Treasury rates go higher, it really is the only environment that we see a sustainable rotation of growth in value.”