Update: Tech stocks have given up all gains since this post went up, with both the Nasdaq and the basket of software stocks we track in the red. From a slightly later perspective, concern about near full-employment and resulting rising interest rates appears to have won the in-market sentiment battle.
The relationship between economic news and the value of technology stocks has been a fun puzzle in recent months.
You might think that strong jobs reports, for example, would lead to general economic optimism and, therefore, upward movements for technology stocks. And you might also expect that poor economic data would lead to general economic pessimism, and therefore downward movement for technology stocks. You know, because tech is a big part of the present-day economy.
Ha, no. Well, partially yes, but also no.
Heading into today’s jobs report, there was a specter hanging over the markets. Namely, the U.S. Federal Reserve, which will begin to tighten monetary policy this year, perhaps through the end of its bond-buying program, cutting its balance sheet and raising rates. The result of the Fed tightening rates is that bonds and other lower-risk assets would become more attractive. At the same time, rising rates are expected to make expensive tech stocks less attractive given risk-adjusted return evolution.
Given that dynamic, you might expect that a strong jobs report today would mean that tech stocks would go down, and a jobs report miss would mean that tech stocks would go up. That almost happened. Today’s December jobs data missed (199,000 net new jobs reported, about half of expectations) and tech stocks initially sold off. But then when markets opened, they ripped higher, with the Nasdaq up 0.34% — while the Dow Jones Industrial Average is down a fraction — and software stocks are up around 0.8%.
Why the drop and then bounce in tech stock value?
There’s concern that we’ve effectively reached full employment. Which could mean that the lackluster December jobs number was not driven entirely by a lack of employer demand, but also in part due to a lack of worker supply. (The fact that we remain in a global pandemic plays into this dynamic, of course
We find ourselves, then, in the weird situation when a poor jobs report could indicate that the economy is stronger (closer to full employment) than anticipated, implying that wages and prices will continue to rise, inducing the Fed to raise rates. Which, as noted above, would mean that higher-risk assets would sell off and less risky assets would become more attractive. And yet tech stocks are a touch higher because, well, it appears that the markets are deciding that the poor-ish report will net out positive for tech shares, which have sold off sharply in recent weeks. Or that the lackluster jobs report will prove less Fed-provoking than a strong jobs report, in essence.
So, tech stocks are higher today and everyone who works in the industry gets a little wealth bump.
Update: Tech stocks have given up all gains since this post went up, with both the Nasdaq and the basket of software stocks we track in the red. From a slightly later perspective, concern about near full-employment and resulting rising interest rates appears to have won the in-market sentiment battle. The relationship between economic newsRead MoreFundings & Exits, Startups, TC, tech stocksTechCrunch