Tech's Tumble: A Shutdown Hangover or a Reality Check?
The stock market took a dive recently, with tech stocks leading the charge downward. The Dow Jones Industrial Average shed nearly 800 points, a stark contrast to its record high just the day before. The stated reason? Fears about "bloated valuations" in the tech sector resurfaced, coupled with diminishing hopes for a December rate cut by the Federal Reserve. But let's dig a little deeper than the headlines.
The Missing Data Mystery
The government shutdown threw a wrench into the usual flow of economic data. Specifically, the market is grappling with the potential non-release of October's inflation and jobs data. The White House even suggested that this data might never be published. Karoline Leavitt, the White House press secretary, stated that the absence of this data would leave Fed policymakers "flying blind."
Now, here's where the narrative gets interesting. The market's reaction seems predicated on the assumption that this missing data would have supported the case for a rate cut. What if the data, had it been collected, painted a different picture? What if it showed persistent inflation or a surprisingly strong jobs market, making a rate cut less likely anyway? The market's sell-off, then, could be interpreted as a pre-emptive adjustment to a potentially less dovish Fed, regardless of the shutdown's data disruption.
The probability of a December rate cut, as measured by the CME FedWatch tool, dropped from roughly 60% earlier in the week to around 50% (a coin toss) by Thursday's close. Last month, it was at 95%. That's a seismic shift in expectations, and it's hard to attribute it solely to the data blackout. There are other factors at play, including ongoing concerns about the tech sector's high valuations. Stock futures drop as tech shares get hit hard again: Live updates
Tech's Vulnerability: More Than Just Rates
Yes, interest rates matter. Higher rates make borrowing more expensive, which can dampen investment and economic growth. But the tech sector's sensitivity to rate hikes isn't just about borrowing costs. It's also about future earnings. Many tech companies, particularly the high-growth, high-valuation ones, are priced based on expectations of significant earnings growth far into the future. Higher interest rates erode the present value of those future earnings, making those companies less attractive to investors.
Consider this: if a company's earnings are projected to grow at 20% per year for the next decade, a small increase in interest rates can have a disproportionately large impact on its current valuation. It's like a long-duration bond; the further out the payments, the more sensitive it is to interest rate changes. Tech stocks, in this sense, are the "long-duration bonds" of the equity market.
Carol Schleif, chief market strategist at BMO Private Wealth, anticipates "market chop" as the government gets back on its feet and economic data starts flowing again. But I think it's more than just short-term volatility. The market is undergoing a fundamental reassessment of risk, and tech stocks are bearing the brunt of it.
And this is the part of the report that I find genuinely puzzling: Why did the market wait for a government shutdown to trigger this reassessment? Were investors simply ignoring the underlying risks, lulled into complacency by a decade of low interest rates and seemingly endless tech optimism?
The Market Isn't "Flying Blind"—It's Waking Up
The market isn't simply reacting to missing data; it's recalibrating its risk appetite after a long period of exuberance. The tech sell-off is a symptom of this broader shift, not just a consequence of a temporary data vacuum.