A week ago, investors’ attention was fixed on the renewed slump in government bond prices and the knock-on impacts thereof.
That already feels like a distant memory in the context of both this week’s improving fortunes and, much more significantly, the emergence of a horrifying war in the Middle East. But from a blinkered economic perspective, it would be remiss not to give the recent yield spike its due consideration.
There are any number of angles from which to address the issue: the IC companies and markets podcast team tried a few in last week’s episode. The Federal Reserve’s ‘higher for longer’ message has hit home, but this is not the only story. Yields may also be rising because of better growth prospects, or because recession is on the way. And are technical factors, such as an increase in supply and a shift in term premia, having their own impact? The answer to these questions, unknowable as they may be at this stage, could have a sizeable bearing on portfolios in the months ahead, which is why they have attracted so much attention.
Yet there are other market mysteries out there to which less notice has been paid. Whatever its causes, the immediate effect of the bond sell-off was clear: it put a dent in equity markets’ progress. The putative process by which this happens is familiar to us all: higher rates cause problems for growth stocks. From this top-down view we can peer further in, and settle, as is so often the case these days, on the big US technology companies. It’s here that the other puzzle lies.
The US tech giants have once again had an outsized influence on equity market fortunes this year, boosting many a private investor portfolio in the process. After a hairy 2022, Microsoft, Apple, Alphabet, Meta et al are each up 40 to 50 per cent year to date. The driver for this has in large part been AI euphoria – although the question of why Apple, arguably playing catch-up when it comes to AI capabilities, has managed to surf that wave so effectively is another story.
The events of recent weeks emphasise a different tale. In September and early October, investors belatedly started to believe policymakers’ insistence that rate cuts are not on the table any time soon, and long-dated yields started rising due to some combination of the factors mentioned above. The growth-focused S&P 500 and MSCI World indices duly underperformed the FTSE 100 over the period. SocGen’s market analysts, analysing these moves, say the issue is in part that the world’s “biggest 10 stocks prefer yields to be going down not up”. As you’d expect, those big companies are the same stocks mentioned above: US tech accounts for eight of the 10 largest members of the MSCI World index.
And yet. Contrary to received wisdom and indeed the quote above, many tech giants outperformed during this sticky September patch. The S&P 500 fell 5 per cent in dollar terms last month as the 10-year US Treasury yield rose from 4.1 to almost 4.6 per cent. But the losses sustained by the likes of Microsoft, Alphabet and Meta were smaller, even if Apple, Amazon and perhaps unsurprisingly Nvidia struggled to a greater extent.
A similar scenario followed the publication of US jobs figures on 6 October. Better-than-expected data increased the chances of another rate hike, prompting US Treasury bonds to fall again. Big tech, by contrast, enjoyed a day of plain sailing.
In short: the correlation between higher rates and lower share prices, which so hurt the sector in 2022, has been harder to discern during this latest panic.
While these are small moves over very short time periods, they are worth pondering. Periods of market stress, however brief they prove, tend to give us information we would otherwise lack. Still, at this stage we should not jump to definitive conclusions, tempting as it may be to think that the world’s largest companies can nowadays benefit from a kind of safe-haven effect. There are, after all, plenty of reasons to be bullish or bearish on these shares on a case-by-case basis.
Instead, it is safest to surmise that shares do not always dance to the beat of macroeconomic moves, at least not in the way we might think. That’s precisely why the fundamentals of company performance remain so important. When it comes to investing, we should be wary of relying too much on grand narratives – or on the belief that we know how these narratives will play out if and when they do emerge. That is all the more reason to keep things focused on the companies themselves and how they are performing at an operational level.
