According to Jim Collins, the fortunes of the Nasdaq 100 and the perception of higher interest rates have become intertwined.
“The reasoning seems to be that Big Tech valuations are based on heavy discounting of future events and yet-to-be-developed products (like robotaxis, for instance) and that lower interest rates should produce higher present values,” Collins wrote recently on Real Money.
On a day-to-day bases, interest rates are largely irrelevant to Big Tech's actual business.
“Tesla (TSLA) would be impacted by higher rates, to some extent, but for companies like Facebook (FB) and Netflix (NFLX) it makes absolutely zero difference to their day-to-day business,” Collins noted. “People would waste hours on the mindless drivel produced by Zuck's election-meddling creation if the 10-year were at 1% or 10%. It doesn't matter.”
Yet rising interest rates are the one factor that Collins believes could derail Big Tech's Magic Carpet Ride of stock market gains.
“Interest rates are rising,” he said. “I am seeing the 10-year UST note quoted at 1.65% as of this writing (it was 1.66% a few minutes ago) and am surprised to see a "one-handle" on the 5-year UST note - 1.19%, and a "two-handle" on the 30-year UST bond - 2.12%.
Collins said Bloomberg's U.S. rates and bonds page has some interesting analytics. “Compared to one-month ago, the 10-year yield has risen 33 basis points and versus the year-ago date, it has risen 83 basis points,” he noted. “That's a move. Do not ignore it.”
Rising rates of inflation are never a good thing, Collins adds.
“Classic economics tells us that the economy will structurally produce some inflation as population growth leads to household formation and an increase in competition for limited resources,” he said. “Thanks, Adam Smith, but in the real world, inflation really hurts people.”
Collins’ advice? Buy some iShares' Short US Treasury ETF (TBT) to take full advantage of higher interest rates (lower bond prices) and layer some of the iShares' short Nasdaq ETF (QID) in with all your Big Tech winners to protect your gains.
“After all, when the levee breaks...make sure you have a raft,” he said.