S&P500 is down 6.5% since the start of January.
Nasdaq is down over 10%, the Dow 6%.
Why do stocks go down when Treasury yields (i.e. interest rates) go up?
Especially tech stocks!
Thread 👇 🧵
1/ The standard textbook explanation is this:
The Fed ⬆️ rates, this ⬆️ borrowing costs for banks and pretty much everyone else.
The story then unfolds:
Interest rates ⬆️, mortgage and credit card rates ⬆️, disposable income 🔽
2/ Now you, the consumer, are spending less money.
When you spend less, firms sell less stuff.
This in turn affects company earnings, and by extension their stock prices.
3/ Tech stocks are particularly sensitive due to the discounted cash flow (DCF) model.
It’s just a way how investors value stocks.
Anticipating what the future cash flow of tech firms is worth today.
4/ The key metric here is the discount factor which lowers the present value of future earnings.
And the discount factor reflects interest rates in the economy.
As interest rates go ⬆️ the present value of future earnings goes 🔽