October 25, 2021

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Bond Yields Rise, Dimming Prospects for Tech Stocks – What’s News

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

Annmarie Fertoli: Why rising bond yields are causing a pullback in tech stocks.

Amrith Ramkumar: A lot of the justification for the tech trade for so long has been that yields are super low interest rates that are going to stay super low. And people aren’t really saying that’s going to change, it’s just when you get a sharp rise in bond yields like we’ve seen over the past week or two, investors that are likely to take some of their tech trade off the table.

Annmarie Fertoli: And talks continue on Capitol Hill to avoid a government shutdown on Friday. Plus, marijuana used to be a taboo topic at work. Has legalization changed that? It’s Wednesday, September 29th. I’m Annmarie Fertoli for The Wall Street Journal. This is the PM edition of What’s News, the top headlines and business stories that moved the world today.
Democrats are racing to avoid a potential government shutdown on Friday by voting on a standalone short-term funding bill as early as tonight. They’re also trying to push key parts of President Biden’s legislative agenda through Congress, including a $1 trillion infrastructure bill and a separate $3.5 trillion spending bill that covers everything from education to healthcare. Republicans in the Senate have blocked democratic attempts to suspend the debt limit, protesting the scope of Democrats spending ambitions and arguing that Democrats carry the responsibility for authorizing more borrowing.
Federal Reserve chairman Jerome Powell said today that a period of higher inflation might last longer than officials had originally expected. So-called core prices, which exclude the volatile categories of food and energy, shot up 3.6% in July from a year earlier. That was due mostly to supply chain disruptions, but during a discussion moderated by the European Central Bank, Powell also reiterated that he expected prices will come back down on their own. He blamed high prices on supply constraints and stronger consumer demand as the economy reopens.
University endowments made their biggest investment gains in decades in the past fiscal year, thanks to huge venture capital returns and a soaring stock market. Institutions like Brown, Duke, and Washington University in St. Louis saw their portfolios go up by more than 50%. The University of Minnesota and the University of Virginia saw gains just shy of that mark. Here’s our reporter, Juliet Chung, with more.

Juliet Chung: Well, we’re seeing blockbuster returns, historic transformational gains from a bunch of large university endowments. This won’t hold across the board, but what’s really driven the returns we’re seeing, 40%, 50%, 60% plus in some cases, are significant venture allocations. But what we do know is that the largest endowments, those managing a billion or more, have significantly more venture exposure generally than smaller endowments do. I very much doubt we’ll continue to see returns like this going forward, and CIO’s are making that very same point. They’re saying, “This is one year. It’s a very unusual year. We invest for the longterm.” But the question really now is, can universities hold onto these gains, and what will return going forward?

Annmarie Fertoli: Endowments fund financial aid, faculty salaries, and capital projects. In addition, gains help direct a school’s annual spending rate and provide support for current and future students.
The NCAA’s division one women’s basketball will now be part of the March Madness brand. The association had previously only used the popular and lucrative marketing slogan for the men’s tournament. The move is one of many recommendations from an external review that was sparked by national outrage over the inequalities at this year’s tournament. It’s still unclear how the brand will be incorporated into the women’s event.
And the U.S. Fish and Wildlife service says that 23 species protected by the endangered species act are now extinct. They include the ivory billed woodpecker, last seen in 1944 in Louisiana, and Guam’s Little Mariana fruit bat, which was last spotted in 1968. According to the nonprofit group, Center of Biological Diversity, this is the biggest batch of species the government has declared extinct.
Coming up, U.S. stocks pickup after a slide earlier this week. U.S stocks recovered some of their losses today after a sell off yesterday, especially among tech stocks. Google parent Alphabet, Apple, Facebook, Microsoft, and Netflix saw their sharpest slide in almost a year on Tuesday. At the same time, long-term treasury yields were rising at their fastest pace in months. The 10 year yield is at a three month high. That’s dimming the prospects for tech companies. Joining me now to explain why is Wall Street Journal markets, reporter Amrith Ramkumar. Hi, Amrith. Thanks for being here.

Amrith Ramkumar: Thanks so much for having me.

Annmarie Fertoli: So, to start us off, can you give us a overview or recap of what happened on Tuesday when we saw bond yields rising in U.S. stocks, especially those tech stocks, falling? What drove that?

Amrith Ramkumar: So far this week, we’ve seen another rotation in markets like you said. So, investors are betting on gradually rising interest rates and a better economic environment that’s pushing up treasury yields, and that’s bad for big tech stocks that investors piled into this summer. And a lot of the justification for the tech trade for so long has been that yields are super low interest rates that are going to stay super low. And people aren’t really saying that’s going to change, it’s just when you get a sharp rise in bond yields like we’ve seen over the past week or two, investors that are likely to take some of their tech trade off the table.
And this is actually a story that’s been playing out in markets for a year, and even longer. So in the past year, we’ve seen these periodic rotations where you’ll get a rise in bond deals and investors will sell tech and then rotate into more economically sensitive things like banks and energy stocks. So we saw that early this year, we saw that a year ago around this time, and even going back further. And then it usually cools off and investors pile back into the tech stocks where we all use these services working from home with Apple, Google, Amazon, Facebook, whatever.
So, it’ll be interesting to see how long this lasts, but that’s what we’ve seen. The latest example. And another reminder that when bond yields go up, the tech stocks that normally carry markets go down really fast.

Annmarie Fertoli: Can you explain the typical relationship between tech stocks and bonds yields? How does that typically work?

Amrith Ramkumar: So low bond yields encourage risk taking, and they make a lot of investors willing to pay more for these out-sized profits in the future that a lot of people expect from tech companies. So, that’s why the relationship is so powerful because investors, again, for so long just this summer and even going back further, have plowed money consistently into these tech companies for that reason, and it all has to do with valuation basically. So, when yields start going up, people are betting on a better economic environment and a lot of the stocks that are more tied to the economy, like energy banks, they’re also cheaper and tend to do better in a rising yield environment. So that’s why these periods, depending on how they last, can be pretty painful for areas like tech.

Annmarie Fertoli: There’s also a big ripple effect here for consumers. Rising yields and falling bond prices can impact everything from mortgage rates to auto loans, right?

Amrith Ramkumar: Yeah. And that’s a broader question about the direction of rates and the economy. I think, yeah, treasury yields rising from about 1.3% to 1.5%, consumers have to watch that closely and that could have some modest effects moving forward. Rates are still super low. And again, when adjusting for inflation, they’re negative in a lot of cases. But yeah, I think longer term if the economy continues to do well and bounce back from this seasonal slowdown and Delta variant slowdown, you could see rising yields and eventually rising interest rates with the FED lifting them gradually. So, I think it’s a reminder again, that this period of ultra low rates, a ton of accommodative monetary policy, it might not last forever. And some people have gotten very comfortable with the idea that this is just the environment we’ll be in forever, almost.

Annmarie Fertoli: So the current swing we’re seeing right now, is that any different than temporary moves we’ve seen in the past that have turned out to be just that, temporary?

Amrith Ramkumar: That’s the big question, and one that a lot of people on Wall Street are talking about now because yields are a function of where interest rates are and that’s determined by the FED, and just broadly how the economy is doing. So we’ve seen the FED say that they plan to start paring back their bond purchases later this year and they might raise interest rates from near zero levels next year. So it’s not like the FED is getting super aggressive with tightening policy. They’ve said they’re watching how things are going, they’re monitoring the pandemic, et cetera.
I think the broader thing that a lot of people are grappling with though, is that these economic disruptions caused by the pandemic, some of the longer term effects, people don’t really know what they’re going to be. So there is a camp of thought that inflation might just generally be higher and the economy might perform a little differently. If that’s the case, maybe longterm government bond yields rise a bit more, and that could be a factor pressuring this area.
So, it really remains to be seen how long this will last. So many people are ultra confident in these tech companies based on their earnings performance, strong revenue growth. And the fact is, when adjusting for inflation, government bond yields still yield very little. So, you always hear this, “There’s no alternative to owning stocks,” then there’s no alternative to owning shares of these tech companies.

Annmarie Fertoli: So, Wall Street analysts have warned that a pullback is likely this fall. What else is driving the retreat from stocks?

Amrith Ramkumar: Honestly, a big factor is just that stocks haven’t gone down in a really long time. So everyone, like you said, is just waiting on pins and needles for a pullback, for a correction. It’s really amazing the S&P 500 hasn’t gone 5% below an all time high in almost a year, and it’s the longest such streak in three and a half years, going back to early 2018.
And we’re still in a global pandemic. There’s all this economic uncertainty. The FED and other Central Banks are talking about how eventually they’ll have to raise rates. You have China Evergrande, the giant property developer, people are bracing for that to collapse. You have the debt ceiling deadline looming. There are all these other factors swirling around. And so, that can have an impact on sentiment where everyone’s expecting a pullback, waiting for a pullback, and that could trigger it.
On the other hand, again, people are just so confident in the outlook for stocks they don’t know where else to put their money, and people always want to buy the dip, at least recently. So, it’ll be interesting to see whether we even get to that 5% level where the S&P 500 still hasn’t breached it for so long. And yeah, again, it’s amazing as the Delta variant continues spreading, people are uncertain about the economy, all of these things, but stocks keep doing pretty well.

Annmarie Fertoli: And Amrith, what about upcoming earning season? Might that boost investor confidence here?

Amrith Ramkumar: Yeah. The outlook for corporate profits has just been the main thing underlying the strungs run up in stocks throughout the past year plus. So yeah, people expect good things from companies. They’ll be watching to see how supply chain disruptions and commodity price increases are impacting the bottom line for a lot of these large companies. But ultimately that’s again, why we get the 2% drop in the S&P 500 and then people calm down and go in to buy again because they’re really confident in the outlook for a lot of these companies moving forward. So yeah, as we get to the end of the third quarter, that’s definitely the next big thing on people’s radar.

Annmarie Fertoli: That’s Wall Street Journal markets reporter Amrith Ramkumar. Amrith, thanks so much for joining me today.

Amrith Ramkumar: Thanks for having me.

Annmarie Fertoli: And finally, it’s not unusual for coworkers to mingle at a happy hour and get to know colleagues over a beer or a cocktail. But now that marijuana has been legalized in 19 states and Washington DC, what are the rules for bonding over bud? Here’s our At Work columnist, Krithika Varagur.

Krithika Varagur: It creates more gray areas, which is always thorny when you’re trying to figure out what flies. And because it’s different from state to state, employers that have workers in many states often have to come up with creative policies that address all of them. But a blanket rule that I’ve heard from an employment lawyer who was quoted in my piece is that, “Impairment, which is to say actually being high on the job, is almost never going to fly,” and that was backed up by people who run cannabis companies themselves. Even if you work in the industry, they’re not exactly smoking up during the workday. So, it very much remains in the same category, I’d say, as alcohol. Limited to off-sites, after hours socializing, and special events.

Annmarie Fertoli: And that’s What’s News for this Wednesday afternoon. We’ll be back tomorrow morning. If you like what you hear, please rate and review us. I’m Annmarie Fertoli for The Wall Street Journal.

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