Long-shots, not long duration

Wall Street's main indexes have dropped to start the year

Wall Street's main indexes have dropped to start the year. Previously popular technology stocks dropped as expectations of rate hikes pushed U.S. Treasury yields to fresh two-year highs. Investors in the Nasdaq Composite Index, and technology-focused ETFs such as Cathie Wood’s ARK Innovation ETF (“ARK”), have been particularly penalised. As of January 14, the former was down 4.8% while the latter was down 15.2%. In fact, more than 220 U.S.-listed stocks with market capitalisations over $10bn are down more than 20% from their recent highs. Some have bounced back in the last few days, but most remain in bear markets.

What gives? “Elevated yields, in particular, tend to discount the present value of future cash flows,” Jack Denton of Barron’s, writes “and the valuations of many tech stocks are reliant on the notion of profits well into the future.”

Is it as simple as yields up, tech valuations down? The rationale behind this is technology stocks are long-duration; that is, the bulk of thei…