19 Feb IT IS ALL ABOUT INTEREST RATES
The 10-year Treasury is at the highest yield in a year. Many market luminaries have defended current lofty valuations—the highest since the records achieved during the dot.com mania of 21 years ago—by citing low interest rates as such will justify current valuations.
However, during the past several days the dynamics are radically changing with many now questioning valuations, especially technology companies that derive their lofty valuations by discounting future cash flows by some interest rate. The higher the interest rate the lower the valuation.
The vast majority of the mega sized technology companies have warned that revenue growth will slow for the for seeable future, the result of the reopening of the economy. According to First Trust approximately six years of revenue growth was front loaded into 10 months. The issue at hand is the markets have valued these companies that last year’s exemplar growth will continue to infinity and interest rates will never rise.
Many bulge bracket firms from CitiCorp to Bank America to Goldman Sachs have warned of a possible 10% to 25% decline because of today’s environment. Will such a decline come to fruition?
Contrary to popular belief, interest rates dictate equity direction not vice versa.
Commenting on yesterday’s market activity, equities were mixed with the NASDAQ declining about 0.50% and the Dow off about 0.20%. Treasuries were moderately higher in yield. Oil slipped as Texas may begin to thaw.
Last night the foreign markets were mixed. London was down 0.02%, Paris up 0.49% and Frankfurt up 0.44%. China was up 0.57%, Japan down 0.72% and Hang Seng up 0.16%.
The Dow should open nominally higher as Treasury Secretary Yellen endorsed yet even more stimulus. Oil is off about 2% as President Biden indicated he is willing to meet with Iran . The 10-year is off 2/32 to yield 1.30%.