Last week the stock and bond markets took a step back on renewed concerns about rising interest rates. Tech stocks dragged down the stock market with Apple and NVIDIA leading the losses. Those two names have been strong leaders all year, of course, even providing ~30% of the overall S&P’s gains through the end of August. In theory, tech stocks should indeed be more vulnerable to higher interest rates, as valuations typically compress when rates rise, though that hasn’t necessarily been the case yet this year as Treasury Yield 10 Year yields are nearly 50 bpts higher than where they started the year. Nonetheless, there is vulnerability, especially with valuations above average suggesting prices are rich.
According to the investment firm Research Affiliates, who recently wrote that technology stocks trade at 26x the next twelve months' expected earnings (NTM), which is well above where they started this year at 20x. For an additional frame of reference, their 10-year average NTM P/E is 18.5. High valuations do not necessarily mean negative returns, but they do historically suggest below-average performance moving forward. Also given that stock and bond prices are now moving in sync and the expectation that inflation volatility may not be over, global multi-asset portfolios with exposure to diversifying asset classes such as global fixed income, alternatives and real assets seems to be a reasonable way to build more resiliency into investment portfolios in this environment, especially if interest rates continue to rise.
As for potential market-moving events this coming week, the economic calendar is loaded with inflation data. Both the Consumer Price Index and Producer Price Index will be released mid-week. Expectations are for little movement from prior readings of both indices and could reinforce the idea that rates will need to remain at their current higher levels (if not higher) to continue pushing inflation down toward target levels.
Add it all up...
Stay invested. Stay diversified. Stay disciplined.