Tech stocks are particularly sensitive to higher interest rates because they tend to have higher price-to-earnings ratios and low or no dividend payments. Higher rates lower the present value of their expected cash flow, taking a bite out of expected future profits, and driving stock prices lower. Investors also tend to look for dividends or interest payments from fixed-income investments during times of economic uncertainty. Investors have loved tech stocks throughout the pandemic, and if you were one of those who snapped up some of these stocks, your portfolio has probably been struggling. So expect more volatility this week depending on what these companies report. And if your investments are all in the tech sector, this might be a good time to consider more diversification to spread out your risk.
PMI Signals Possible Economic Slowdown
In what could be a sign of an economic slowdown, the private sector is putting the brakes on its manufacture of goods, according to today’s Purchasing Managers’ Index (PMI) data from S&P Global. The PMI is a measure of business activity in the United States, and looks at a variety of things, from the number of new orders businesses are taking, to the cost of materials and items needed to manufacture new goods. Today’s PMI output index dropped to 47.3 from 49.5 in September, a two-month low. That’s the second-fastest decrease since 2009 (during the Great Recession), with the exception of the start of the COVID-19 pandemic. Producers reported inflation, stock building earlier in the year, and weaker demand from clients as reasons for the drop in production. According to the data, inflation increased at the start of the fourth quarter (which began in September), weighing on producers. Interest rates, shortages of materials, and higher cost of wages were some of the reasons why so many manufacturers saw higher manufacturing costs. Interestingly, those costs weren’t passed on to us shoppers at the same rate—but it’s unlikely businesses can keep that up forever. If inflation doesn’t come down, shoppers will probably have to start paying even more for goods as manufacturers pass along higher costs to the consumer. -Kristin
