Sunday, September 24, 2017

Higher Bond Yields A Headwind For Technology Stocks

In a recent note from the John Murphy of the stockcharts.com website ($$) he notes technology stocks tend to have an inverse relationship to bond yields. In his commentary he noted,
  • "One of the lesser known intermarket principles is the inverse link between bond yields and technology stocks' relative performance...Growth stocks like technology...do better in a slower economy which is usually associated with low interest rates."
  • "Value stocks (like banks) do better in a stronger economy with rising bond yields...Rising global bond yields could make the going tougher for technology stocks."
The below chart was included with his comment and shows the inverse relationship between the 10-Year Treasury yield (red line) to a ratio of the Technology SPDR (XLK) divided by the S&P 500 Index. Jon Murphy notes, "Rising rates this past month may again be contributing to tech selling, especially with a more hawkish sounding Fed. The inflationary impact of rising energy prices may also give the Fed more cover for a December rate hike."


Weakness is beginning to show in some of the large cap technology stocks. Below is a chart of the average return of Apple, Alphabet and Amazon for month to date in September. This time period is a short three weeks, but the performance of large cap technology stocks is something investors will want to follow as the last three months of the year unfold.


Disclosure: Firm/family long AAPL, GOOGL


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