Technology shares have been in a perfect storm in the last couple of weeks, fueled by rising bond yields, regulation concerns, and geopolitical events that have raised investor anxiety.
The storm will pass, and technology shares will resume the leadership they have enjoyed on Wall Street in the last 18 months.
Rising Treasury Bond Yields
There was a time the U.S. Treasury bond yields stayed well below 1%. Unfortunately, that was most of 2020, as the Federal Reserve stepped up its accommodative policy to fight the pandemic recession.
Low bond yields, in turn, prompted investors to look for higher returns on their money elsewhere on Wall Street, including the technology sector. Thus, the big rally in the technology giants’ shares helped drive the tech-heavy Nasdaq to new highs.
But as the American economy began to recover from the pandemic in 2021, U.S. Treasury bond yields have been heading north, rising from around 0.7% in the summer of 2020 to 1.55% last week.
Rising bond yields, in turn, prompted investors to take profits from the technology sector and search for higher returns in the energy and material sectors. Thus, the sell-off in tech shares and rally in the shares of the energy and material shares.
The good news is that Treasury bond yields have stabilized around the 1.5% mark, as the Federal Reserve is prepared to remove monetary accommodation through tapering.
Regulation Concerns
From China to the U.S. and Europe, technology giants have been on regulators’ radar.
In China, regulators have been after technology giants like Alibaba (BABA), limiting its dominance. They have also been after American technology firms like Qualcomm (QCOM), imposing hefty fines for alleged market abuses.
In Europe, regulators have been after Google (GOOGL), trying to limit its dominance there. Meanwhile, American regulators have been going after Facebook (FB), Google, and Amazon (AMZN), limiting their market power.
The good news here is that regulators can do very little to achieve their objectives. Technology giants have already developed strong barriers to entry to protect their markets from competition.
Microsoft (MSFT) is a case in point. In early 2000, U.S. regulators spent tens of millions of taxpayers’ dollars to limit the company’s power without avail.
Geopolitical Events
For years, geopolitical events had little effect on technology giants, as investors focused more on easy money policies pursued by central banks around the globe.
In recent weeks though, geopolitical events are catching up with technology events, like the renewed trade tensions between the U.S and China. Then there are the growing tensions between China and Taiwan, which threaten to disrupt the semiconductor supply chain further.
The good news here is that these geopolitical events aren’t new, and they usually fade away with time.
In short, the perfect storm that hit the high sector in recent weeks is likely to pass away.
Disclosure: At the time of publication, Panos Mourdoukoutas owned shares of Microsoft, Qualcomm, Google, Facebook, and Alibaba.
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