Let’s take a look at the impact that rising interest had on this sector of the market.
Tech stocks are a popular investment choice for many investors, as they generally offer higher potential returns than traditional investments. However, tech stocks can be vulnerable to market volatility, especially when interest rates rise. When interest rates increase, the cost of borrowing rises, impacting the ability of companies to access capital, and reducing their potential for growth and market success.
One of the primary impacts of higher interest rates is that they lead to a stronger dollar, which reduces the competitiveness of tech companies in the global market. When the dollar rises in value, it takes more dollars for the same amount of a foreign currency, and this makes exports from U.S. companies more expensive. High-tech products such as computers, cellphones, and software have significant international demand, and tech companies rely on cost-effective exports to remain competitive. If their products become too expensive, they will lose market share and have a decreased ability to innovate.
Additionally, higher interest rates reduce companies’ ability to borrow money for reinvestment, research, and development. Tech companies are heavily focused on innovation and growth, using their available funds to develop new products and services, and compete with rivals. With rising interest rates, tech companies often have to choose between focusing their resources on paying off loans or allocating them to innovative initiatives. This can slow the pace of change and limit the growth of the sector.
Finally, many tech companies have low dividend payment rates, so their stock prices are not influenced by the same level of dividend yield as more traditional investments. As a result, tech stocks are particularly vulnerable to changes in interest rates, as the stock prices often reflect the perceived business performance, rather than the actual dividend yield.
I recently spoke with an investor that has lost over $1,000,000 just amongst his allocation to big name tech stocks. He had no idea that an economic event as simple as rising interest rates could have such a negative impact on his investments.
The reason is simple, rising interest rates can hurt tech stocks by making their products more expensive, reducing their borrowing capacity, and affecting their stock prices. To stay competitive, tech companies must carefully manage their resources (i.e., raise prices) and take measures to minimize the impact of higher rates (Layoffs).
How to protect your self is easier said than done as diversification can only protect you so much. The answer is this – invest in concentrated positions, technically solid stocks and direct hedge those positions by using options.
Stay tuned to learn more.
Jeffrey Beamer, February 3 2023
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