With the prospect of the US Treasury Secretary hiking up interest rates, will tech stocks suffer?
As tech stocks on Nasdaq fell 2% with rumours that the US Treasury Secretary was considering putting up interest rates that will adversely effect the values of tech startups. Cloud stocks were hit by a fall of nearly 4%. This was all due to the US government saying that interest might have to go up. When interests are low, money usually gets invested in tech stocks and venture capital funds will be invested into tech startups. With interest rates going up, it might be riskier to invest in tech startups, as opposed to safer investments.
Just on the mere hint of a future US interest rate rise, investors are now responding by selling tech stocks. Tesla had fallen by 6%, after record highs earlier in the year. Apple has fallen from a high of $145 down to $122.77. This brought to a holt the rise in value of tech stocks that had been going up for a prolonged period. Cyber currencies, namely Bitcoin, hadn’t been spared this potential rate rise effect either, with their fluctuating values throughout this year, Bitcoin rising sharply on Musk’s tweet that he would accept Bitcoin for transactions for Tesla orders. After that tweet Bitcoin continued to rise sharply up to $64,863 in February, down to $49,712 in May 2021.
With relatively cheap money to borrow, tech stocks, with their rise in recent years have been a must-have stock in many portfolios, but their attraction has started to cool off, after this recent potential suggestion of a US interest rate rise. With the rise in yields, bonds are now becoming more affordable to investors, away from techs stocks, which are looking less attractive. Also, as the Covid vaccine is now rolling out, investors are looking at stocks investments other than tech stocks.
The waves pushing tech stocks forward and upwards are now receding, as investors, wary of erratic markets and the prospect of losing money, are shying away from tech investments, at least in the short term. This will also affect the value of future tech IPOs and any interest in the valuation of tech startups.
The fall in tech stocks is a direct result of news of a potential future interest rate rise and with the economic recovery now on the horizon, stock investments are now being invested into stocks linked to the economic comeback. The lift in yields is also a reflection of investor expectations of a strong economic recovery. But with this recovery, businesses will have higher borrowing costs if interest do rise. With the economic recovery on the horizon, investors will again will have more options to chose from, with more favourable stock alternatives other than investing in tech stocks.