Market Insights: Does the Tech Sector Struggle in a Rising Yield Environment?

Milestone Wealth Management Ltd. - Nov 26, 2021

Macroeconomic and Market Developments:

  • North American markets were significantly lower over the past two weeks. In Canada, the S&P/TSX Composite Index was down 2.93%. In the U.S., the Dow Jones Industrial Average was down 3.33% and the S&P 500 Index declined 1.88%.
  • The Canadian dollar was also down over the past two weeks, closing at 78.18 cents vs 79.73 cents on November 12.
  • Oil prices sold off strongly as well over the past two weeks. U.S. West Texas crude closed at $68.15 vs $80.85 and the Western Canadian Select price closed at $58.54 vs $60.87 on November 12.
  • The gold price was also lower over the past two weeks, closing at $1,803 vs $1,865 on November 12.
  • After the recent power struggle at Rogers Communications (RCI.b) which saw Edward Rogers gain control of the board of directors, CEO Joe Natale has left the company. The CFO, Tony Staffieri, the person with whom Edward Rogers had previously secretly tried to replace Natale, has now taken over as interim President and CEO. In related news, hearings began this week into the proposed takeover of Shaw by Rogers. The deal will need to be approved by the CRTC, the Competition Bureau, and from Innovation, Science and Economic Development Canada. BCE has spoken out against the deal, urging the CRTC to reject the $26 billion deal.
  • On Monday this week, U.S. President Biden renominated Jerome Powell as the Chair of the U.S. Federal Reserve. There had been speculation in recent weeks that Biden would go with the more Democratic choice of Lael Brainard, who was thought to be more dovish towards interest rates. However, he chose to stay the course with Powell and appoint Brainard as vice-chair. Interest rates reacted by rising quite significantly early in the week, only to fade as the week progressed.
  • Stock markets dropped sharply and bonds rallied on Friday in response to the discovery of new COVID variant B.1.1.529, which features a high number of mutations. Certain countries have already suspended flights from southern Africa in an attempt to slow the spread. Travel related stocks such as airlines and cruise lines were particularly hard-hit on Friday, with stocks that would typically benefit from another wave up on the day, namely Zoom, Peloton, Pfizer and Moderna.
  • After repeated requests to OPEC to increase production to bring down the price of oil, Biden this week announced that the U.S. would release 50 million barrels of oil from the Strategic Petroleum Reserve, including 32 million barrels over the coming months. At first, the price of oil declined, but then stabilized when OPEC announced that they might in turn simply not increase production as they had previously announced, which could offset any additional oil from the reserve. Oil finished the week on a down note after the discovery of the new strain of COVID.
  • U.S. Retail Sales beat expectations in October, with a gain of 1.7% compared with an expected gain of 1.4%. Year-over-year, Retail Sales are up an incredible 16.3%. Sales excluding autos increased 1.7% in October vs an expected gain of 1.0% and are up 17.6% in the past year. Excluding gas, sales rose 1.5% in October and are up 14.1% year-over-year.
  • U.S. Real (after inflation) GDP growth in Q3 was revised higher in the second estimate of GDP growth. The new estimate for Q3 2021 is 2.1% annualized growth rate from a prior estimate of 2.0%, slightly below the consensus expected revision to 2.2%. Minor upward revisions to consumer spending, inventories, and government purchases more than offset downward revisions to business investment, home building, and net exports. The largest positive contributions to the real GDP growth rate in Q3 were inventories and consumer spending while the weakest component was net exports.
  • Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Updating Our Tactical View From 11-08: DWYER VLOG

Weekly Diversion:

Check out this video of a California freeway grinding to a halt after money accidentally fell from an armored truck.

Charts of the Week:

We see many comments suggesting that the technology sector, which most view as a growth sector, will not perform well in an environment where interest rates are rising. We especially see these headlines make the rounds when tech stocks come under pressure like we saw earlier this week, with the old argument that tech can’t rally in a rising rate environment because it puts pressure on the stock’s price/earnings multiple. Perhaps this subjective view is one looked at in isolation, but one must consider the entirety of other forces that drive asset prices (primarily growth and inflation). However, upon observation of the data, the facts simply don’t back that up. Examine the post-financial crisis period (last 11 years); the tech sector has actually performed better when interest rates are rising versus falling. This trend may seem counterintuitive, but we have the tech sector as one of the top sectors to hold in a reflation environment (growth accelerating, inflation accelerating) which we are currently in. The other sectors that tend to be the strongest in this environment (what we refer to as Quad 2) are consumer discretionary, industrials, energy, and financials.

To begin, we need to define what we view as a rising or falling rate environment. We consider this as a 20% or more increase (or decrease) in the 10-year US Treasury yield without a 20% decline (increase) in its yield in between. With that definition in place, we can count 15 periods of rising rates, and 15 periods of falling rates since 2010 for a solid comparison. Pictured below is a chart that shows the median performance of the US technology sector vs. the overall S&P 500 during periods of rising and falling inflation over the last 11 years. Notice the tech sector has outperformed the overall market by a median amount of 0.4% when rates are rising and has had positive returns in all 15 periods as opposed to 14/15 for the overall market. On the other hand, the tech sector has underperformed the overall market by a median 0.8% when rates are falling and has been positive 9 out of the 15 periods vs. 10 for the overall market. What may be glaring from this chart is what one may not expect; the market in general has actually performed better in rising rate periods as opposed to falling.

Source: Bespoke Investment Group

Next are the charts that show a more detailed picture with all 15 periods of rising and falling rates. The evidence is very clear, since the Great Recession markets have performed better in general in rising rate environments than falling. In rising rate periods, it is worth noting that the technology sector has outperformed the S&P 500 11 of out of the 15 times, while in falling rate periods, although much less uniform, the tech sector has outperformed the S&P 500 only 9 out of the 15 time. The final conclusion from this data is that the tech sector remains a strong component of the market and has outperformed the overall S&P 500 on both an absolute and relative basis when interest rates are rising versus falling.

Source: Bespoke Investment Group


Sources:, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group, Wealth Professional