Global economies are slowly looking to reopen their doors amid the coronavirus pandemic, which could be fueling investor risk once again. Technology equities have been the toast of the town, but will rising yields signal forthcoming weakness in a space that’s been forging on following the pandemic sell-offs in March?
With social distancing measures in place, the use of technology has reached a fever pitch, which has fueled their equities. However, is the tank finally full?
“The danger now is that the market is overly reliant on a group of companies that are all a bet on disruptive innovation—the big five and a wider circle including other fast-expanding growth companies such as Netflix and Nvidia,” a Wall Street Journal article said. “They have thrived since the pandemic began because so much of their lifetime profits lie far in the future, meaning their valuations benefit from low rates while short-term pandemic-related hits matter less.”
The article went on to note two risks that rising yields pose for technology.
“The first risk is that yields go up because the economy is healing,” the article noted. “The opposite happened on Tuesday when bond yields fell as investors became more cautious about economic recovery. Not surprisingly, twice as many stocks fell as rose, and the average stock fell. Yet the S&P 500 passed its February high because the ones that did rise were far bigger: the 168 gainers on the day averaged a market value of $103 billion, while the 332 losers were worth an average $40 billion.”
“The second risk is that yields go up because the Federal Reserve becomes more hawkish,” the article added. “Earlier this week we had a dry run when the Fed minutes disappointed many hoping for explicit guidance on rates soon. Investors changed their view on how the Fed will react in the future, and stocks dropped—with the biggest falling by more than the rest. Growth stocks underperformed, but the mass of the rest did badly too, with again twice as many losers as winners.”
Trading the Dichotomy Between Yields and Tech
Traders can make a leveraged play off both tech and yields using this pair of funds:
- Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF ): seeks daily investment results, before fees and expenses, of 300% of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. The index is a market value weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than 20 years.
- Direxion Daily Technology Bear 3X ETF (TECS ): TECS seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the daily performance of the Technology Select Sector Index. The index is provided by S&P Dow Jones Indices and includes domestic companies from the technology sector.