Market Update                                                                                                                  May 2023
Technology as a sector, has been leading the market this year. Over the last decade this sector has done very well, typically leading bull markets. Last year, it was the worst performing sector.
So, what is the difference between this year and last?
Well, as interest rates started to rise, technology (growth stocks) started to fall in value. Growth stocks as a whole are long-term assets and their value is based on anticipation of future growth. When interest rates rise that growth is effectively discounted and valuations drop. Technology companies also tend to need constant capital infusions that get more expensive as interest rates rise.
Recently, we experienced the quickest rise in interest rates in history by central banks in order to fend off inflation. However,  the market seems to be anticipating stabilization in interest rates and eventual retraction and as a result, we are seeing technology shares starting to rise.
Since 1987, growth stocks have tended to trade inversely to interest rates.Â
I think there are two forces at work in the market right now. One is anticipation of stabilization and eventual reduction in interest rates and the other is recession as the economy gets squeezed by those higher interest rates. Hmmmm.