The relationship between economic news and the value of tech stocks has been an amusing puzzle these past few months.
You might think that strong employment reports, for example, would lead to general economic optimism and therefore upward movements for tech stocks. And you can also expect that bad economic data would lead to general economic pessimism and therefore a downward movement in tech stocks. You know, because technology is a big part of today’s economy.
Oh no. Well, partially yes, but also no.
Going to today’s job report, there was a specter hovering over the markets. That is, the US Federal Reserve, which begin tightening monetary policy this year, perhaps until the end of your bond-buying program, cutting your balance sheet and raising rates. The result of the Fed’s rate tightening 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 the evolution of the risk-adjusted return.
Given these dynamics, you would expect that a strong jobs report today would mean tech stocks would go down, and a lost jobs report would mean tech stocks would go up. It almost happened. Today’s December jobs data lost (199,000 reported net new jobs, about half of expectations) and tech stocks initially sold off. But then, when the markets opened, they rose, with the Nasdaq up 0.34% – while the Dow Jones Industrial Average dropped a fraction – and software stocks rose about 0.8%.
Why the drop and then the jump in the value of tech stocks?
There is worry that we have effectively achieved full employment. Which may mean that the weak number of jobs in December was not driven entirely by the lack of employer demand, but also partly due to the lack of labor supply. (The fact that we remain in a global pandemic plays on this dynamic, clear
We then find ourselves in the odd situation where a bad jobs report could indicate that the economy is stronger (closer to full employment) than anticipated, implying that wages and prices will continue to rise, prompting the Fed to raise rates. Which, as noted above, would mean that riskier assets would be sold and less risky assets would become more attractive. And yet tech stocks are a little higher because, well, it looks like the markets are deciding the poor report will be positive for tech stocks, which have sold sharply in the past few weeks. Or that the mediocre jobs report will prove to be less provocative from the Fed than a strong jobs report, in essence.
Therefore, tech stocks are higher today and everyone who works in the sector receives a small increase in wealth.