With Jerome Powell back in his Fed chair, tech stocks are gearing up for the possibility of higher interest rates.
That’s leading to downward pressure today as reported by Travis Hoium at Motley Fool, who targets Asana, Cloudflare, and Fiverr as three unlucky equities moving downward under the news that Powell has achieved another term in his role.
“Asana was one of the biggest movers early on Monday, falling as much as 22.7% and trading 18.4% lower at 3:15 p.m. ET,” Hoium explains. “Cloudflare also dropped 12% and is currently trading 9% lower, while Fiverr International was down 10% and is now down 7.7% for the day.”
Lael Brainard, the contender for Powell’s seat will become vice chair of the bank. Markets are thinking that Brainard would have been less likely to raise interest rates, hence the changes happening now.
Analysts are reading the tea leaves on possible interest rate activity and showing how companies are reacting negatively. In U.S. Treasury news, the yield on a two-year treasury note has moved to 0.63, the highest since March.
Meanwhile, Hoium points out that the changes in equity value mentioned above are not due to inherent fundamentals, but context.
“There’s nothing fundamentally wrong with any of these companies today and that’s what we should remember as investors,” Hoium writes. “The market is just pricing the future cash flows expected from each stock to be lower, which has a dramatic impact on a stock if most cash flow is expected many years in the future. I think the market has gotten out ahead of itself in many areas and you can see from the high price-to-sales ratios above that these could be overvalued stocks ready for a pullback.”
If that analysis is correct, it could be appropriate to buy on the dip, expecting that stocks will rebound in the short term.
For the long term, although interest rates will perhaps help to deal with inflation, they may have a chilling effect on sectors like the housing market. Then the inflation itself will have a ripple effect throughout the economy.
Factor all of that into your portfolio.
