Interest Rates Matter To Tech Stocks

The Fed hasn’t begun raising interest rates yet, but the belief that tech stocks are somehow immune from the effect of rising interest rates is already being espoused.

It’s true that tech stocks – and stocks in general – can rally for as much as a year after the first rate hike, as they did in 1999-2000. But what followed, in case anyone has forgotten, was the worst bear market since the Great Depression. Two other exceptions to the rule were 1973 and 1987, when stocks peaked with the first rate cut. You all know what followed those rate hikes.

Fed rate hikes slow the economy. To argue that tech stocks are immune from a slowing economy is disingenuous.

We just wish there were more people worrying about that.

When interest rates were 5-6%, a quarter point move by the Fed didn’t mean that much. But a quarter- or half-point move from 1% will be a 25-50% rise in interest rates. The effect could be greater than anticipated.

Which brings us to the subject of jobs, after the stock market sold off Friday on a much strong than expected employment report, on fears that the Fed will have to raise rates sooner and higher than feared.

Fed Chairman Alan Greenspan said Thursday that national and household debt can’t sustain the economy forever. He’s right. What’s needed is jobs growth, which will create self-sustaining economic growth (let’s not forget that consumers are 70% of the economy). We need more months like the last two, hopefully several more, for the recovery to be sustained.

We’ve had only one or two reports so far that suggested inflation. That’s hardly a trend. The Fed will have two more months of data before it meets again in late June. Let’s hope inflation returns to tame levels by then.

If not, the recovery – both for technology and the broader economy – could be in trouble.

The Nasdaq fell 19 to 1917, the S&P 500 lost 15 to 1098, and the Dow tumbled 123 to 10,117. Volume rose to 1.65 billion shares on the NYSE, but declined to 1.65 billion on the Nasdaq. Decliners led 31-2 on the NYSE, and 23-8 on the Nasdaq. Downside volume was 88% on the NYSE, and 63% on the Nasdaq. New highs-new lows were 27-713 on the NYSE, and 30-98 on the Nasdaq.

Cisco bucked the downtrend once again, rising 1% ahead of its earnings due out on Tuesday.

Intel and AMD led the chip sector to a 1% gain on the day.

NVIDIA edged higher on its earnings report, but Activision , Novatel , WebMD , Homestore and Aether fell on their reports.

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