Central-bank monetary tightening rattles tech stocks

Global markets caught a bad case of the January blues. America’s S&P 500 ended last month down more than 5%, its worst monthly performance since March 2020 and its worst start to a year since 2009. Big tech firms led the rout, with the tech-heavy Nasdaq Composite falling almost 9%. Japan’s Nikkei 225 dropped 6.2%. The pan-European Stoxx 600 retreated 3.9% in January for its worst month since October 2020. The FTSE 100 ended the month up 1.1%, but the more domestically focused FTSE 250 finished down 6.6%. 

The key theme so far this year has been “the hawkish pivot by multiple central banks”, say Henry Allen and Jim Reid of Deutsche Bank. On 31 December, interest-rate markets were pricing in about three increases by the US Federal Reserve this year. By the end of January, that number had risen to almost five. Money looks set to get tighter “much earlier than anticipated”. 

That’s a headwind for fast-growing technology stocks in particular, says Patrick Hosking in The Times. Many investors are betting that firms with “innovative intellectual property” or dominant market positions but few or no profits so far can reap big rewards in the future. But higher interest rates make “expected profits in five, ten or fifteen years look dramatically less appealing than hard profits today”. With rates “so close to zero”, even “modest rises” have a huge impact. 

This month’s market “spasms” show that investors are having a difficult time coming “to terms with the end of the era of free money”, says The Economist. Some thought it would “pretty much last forever”. Hence corporations and housebuyers binged on debt during the pandemic, while government borrowing soared. We are about to find out just how vulnerable the world economy is to higher debt servicing costs.