Indeed, the Nasdaq Composite index is on pace for the worst January in its 50-year history, Bloomberg reports. The index has slumped 12% so far this month through Friday’s close, leaving it below the previous record January fall of 10% in 2008.
Rising interest rates hurt tech stocks because they make the earnings these companies may post in the future less attractive compared to safe bonds. In addition, many tech companies have high debt levels, and rising rates will increase their debt servicing costs.
Also, the strong economic demand that is fueling the Fed’s move to higher rates generally favors value stocks over growth stocks. The Fed has indicated it will start lifting rates in March, and many investors and economists expect it will act at least five times this year.
As of Friday, 72% of the Nasdaq’s 3,682 stocks had slid at least 20% from their 52-week highs, and almost half of them had dropped more than 50%, according to Bank of America, as cited by Bloomberg.
Many analysts and investors see further pain ahead for stocks. Hedge fund titan Seth Klarman, chief executive of Baupost, is one of them.
“We don’t know how bad the current bout of inflation will be, but we believe that mounting inflation and the related possibility of materially higher interest rates are posing a real danger to financial markets,” Klarman wrote in a letter to investors obtained by CNBC.
Consumer prices soared 7% last year, the highest amount for any 12-month period in 39 years.