Why technology stocks rallied amid the rising global banking system crisis?
Technology shares recorded their best week in several months for the week ended March 19, at the same time when global stock indexes, especially banking stocks, were hammered on fears of an ongoing banking system crisis spiraling out of control.
The Nasdaq 100 index - the benchmark stock index for top technology companies in the US - gained 6% during the week ending Mar 19, 2023 outperforming the S&P 500's 1% gain and the Dow Jones Industrial Average's modest fall.
Nasdaq100 - Historical Performance
Microsoft and Alphabet closed the week up 12%, while Amazon and Apple jumped up 8% and 4%, respectively, showing investor resilience towards technology shares.
In the US, the closure of operations of Signature Bank, First Republic Bank and Silicon Valley Bank all led to massive fears that the banking system in developed economies was in shambles as the US central bank’s relentless hiking of interest rates damaged the balance sheet of such banks.
Bigger Banks in the US quickly stepped in a massive rescue operation to infuse some liquidity into the above banks to help them stay afloat, somehow!
Why did the banking crisis not affect technology shares?
Investors used to consider bank stocks as a safe haven during uncertain times because of their low valuations, while tech stocks were perceived as risky due to their high valuations.
However, this trend has now reversed. Tech companies that are profitable and have limited exposure to the financial sector, a significant amount of cash, and benefit from fast-growing secular trends like artificial intelligence are now more appreciated by investors.
This is because they are less likely to be affected by a potential bank crisis. In the past week, SVB, Signature Bank, and Silvergate Bank have experienced a decline, while mega-cap banks have stepped in to boost deposits at struggling First Republic Bank.
Additionally, the Biden administration's push for the sale or ban of TikTok has also helped boost tech stocks, with shares of Meta, Snap, and Pinterest seeing an increase of 4%, 4%, and 7% during the week.
Tech stocks jumped as bond yields dropped?
The recent decline in bond yields and the prediction of the US central bank’s to make smaller rate hikes for the rest of the year due to the fallout from the largest bank failure since 2008 is the primary reason for the strong performance of technology stocks in the past week.
The growth of tech stocks is usually hindered by any increase in borrowing costs. The expected US interest rate rate for the end of 2023 has dropped from 5.5% to 3.75%, and the market is now anticipating at least three 25-basis-point rate cuts before the year ends, with the current interest rate at about 4.5%.
This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.