The Nasdaq and the S&P 500 closed lower on Friday, with both recording a second straight weekly decline, as hotter-than-expected U.S. producer prices data pushed Treasury yields higher and sank rate-sensitive megacap growth stocks. The Dow Jones Industrial Average closed higher for the day and ended the week up 0.6%. It was the first time in 2023 that the Nasdaq fell for two straight weeks. The S&P 500 ended the week down 0.3%, with the Nasdaq 1.9% lower.
The U.S. government reported that the producer price index (PPI), which measures the changes in the prices of goods and services, rose 0.8% in the 12 months leading to July, up from a 0.2% rise in the previous month, as costs of services increased. Economists polled by Refinitiv had expected a 0.7% gain.
The PPI data added to the inflation worries that have been plaguing investors for months, as consumer prices have also surged to their highest levels since 2008. Higher inflation erodes the value of future cash flows, making long-term bonds less attractive for investors. Higher inflation also raises the possibility of the Federal Reserve tapering its bond-buying program or raising interest rates sooner than expected to contain price pressures.
Another factor that pushed up long-term interest rates was the increased debt issuance by the Treasury Department, which announced that it would have to issue $2.3 trillion of debt in the second half of 2023, up from $1.9 trillion estimated in May. The higher supply of bonds could lower their prices and raise their yields, as investors demand higher returns to absorb the additional debt.
Big tech stocks suffer from higher interest rates
The rise in long-term interest rates weighed heavily on big tech stocks, which have been leading the market rally this year due to their strong earnings growth and resilience amid the pandemic. However, higher interest rates could slow down the economic recovery and hurt consumer spending, which could affect the demand for tech products and services.
Higher interest rates also make tech stocks less appealing from a valuation perspective, as they reduce the present value of their future earnings and cash flows. Tech stocks tend to trade at higher multiples than other sectors, reflecting their growth potential and competitive advantages. However, when interest rates rise, investors may shift their preferences to cheaper or more stable stocks that offer dividends or buybacks.
Some of the biggest losers on Friday were Tesla TSLA.O, Meta Platforms Inc META.O and Microsoft MSFT.O, which closed down between 0.6% and 1.3%. Nvidia NVDA.O fell 3.6%, dragging down the semiconductor index .SOX by 2.3%. It was the fourth straight decline and its eighth loss in nine sessions for the semis index, and its 5% weekly decline was its worst performance since early April.
How to cope with rising interest rates
Investors who are concerned about rising interest rates and their impact on tech stocks may want to consider some strategies to adjust their portfolio allocation and risk exposure. Here are some possible options:
- Reduce exposure to long-duration or high-multiple tech stocks and increase exposure to short-duration or low-multiple tech stocks. This can help reduce the sensitivity of your portfolio to interest rate changes and valuation fluctuations. Short-duration or low-multiple tech stocks are those that have lower earnings growth expectations or lower price-to-earnings ratios than their peers.
- Diversify your portfolio across different sectors and industries that may benefit from rising interest rates or inflation. This can help reduce your reliance on tech stocks and capture opportunities in other areas of the market that may perform well in a higher-rate environment. Some sectors that may benefit from rising interest rates or inflation are financials, energy, materials, industrials, and consumer discretionary.
- Focus on quality tech stocks with strong fundamentals and competitive advantages that can withstand higher interest rates or inflation. These tech stocks can offer consistent earnings growth and cash flow generation regardless of market conditions. They can also invest in innovation and expansion to maintain or increase their market share and profitability.
