{"id":129905,"date":"2022-03-22T11:19:00","date_gmt":"2022-03-22T15:19:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=129905"},"modified":"2023-02-10T13:31:31","modified_gmt":"2023-02-10T18:31:31","slug":"about-the-correlation-between-tech-stocks-and-interest-rates","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/stocks\/about-the-correlation-between-tech-stocks-and-interest-rates\/","title":{"rendered":"About the Correlation Between Tech Stocks and Interest Rates"},"content":{"rendered":"\n<p>One of the market\u2019s supposed truisms is that there is a clear inverse relationship between tech stocks and interest rates.&nbsp; Supposed may be the operative word here.<\/p>\n\n\n\n<p>There is a solid rationale that relates stocks to bonds.&nbsp; Standard financial asset pricing models key off the risk-free rate, and in that means T-bill rates in the US.&nbsp; Thanks to the recent rate hike, those rates are a number greater than zero the first time in two years, at least in nominal terms.&nbsp; Longer term yields, which reflect market expectations for future rates and inflation, have risen at a much faster pace \u2013 <a href=\"\/campus\/traders-insight\/securities\/macro\/vix-closer-to-all-clear-while-bonds-get-nervous\/\">something we noted yesterday<\/a>.&nbsp; In theory this should be problematic for stocks, though the market seems quite unconcerned for now.<\/p>\n\n\n\n<p>As we all know, \u201cin theory\u201d and \u201cin practice\u201d can be vastly different.&nbsp; In theory, the current price of a stock reflects the market\u2019s best estimate of the present value of a company\u2019s future earnings, cash flows, and\/or dividends.&nbsp; Higher rates mean lower present values, thus lower stock prices.&nbsp; Even though most mega-cap tech stocks conduct businesses that are not particularly sensitive to interest rate changes, their lofty valuations should be quite sensitive to rising rates.&nbsp; That is why we frequently heard the narrative that tech stocks were hurt by rising rates as the NASDAQ 100 (NDX) was falling this year.&nbsp; Yet the evidence of that correlation is modest, and essentially non-existent over the past week.<\/p>\n\n\n\n<p><strong>3 Month Daily Bars, 10 Year T-Note Futures (ZN, red\/green) vs NASDAQ 100 Mini Futures (NQ, blue)<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"975\" height=\"717\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-70.png\" alt=\"3 Month Daily Bars, 10 Year T-Note Futures (ZN, red\/green) vs NASDAQ 100 Mini Futures (NQ, blue)\" class=\"wp-image-129914 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-70.png 975w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-70-700x515.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-70-300x221.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-70-768x565.png 768w\" data-sizes=\"(max-width: 975px) 100vw, 975px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 975px; aspect-ratio: 975\/717;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p><strong>6 Days, 5 Minute Bars, 10 Year T-Note Futures (ZN, red\/green) vs NASDAQ 100 Mini Futures (NQ, blue)<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"975\" height=\"717\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-71.png\" alt=\"6 Days, 5 Minute Bars, 10 Year T-Note Futures (ZN, red\/green) vs NASDAQ 100 Mini Futures (NQ, blue)\" class=\"wp-image-129915 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-71.png 975w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-71-700x515.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-71-300x221.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-71-768x565.png 768w\" data-sizes=\"(max-width: 975px) 100vw, 975px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 975px; aspect-ratio: 975\/717;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p>We see that for the most part, NDX (graphed using NQ futures as a proxy) followed the 10-Year futures lower for the last three months until last week.&nbsp; On a daily basis they may have diverged, but the trends followed reasonably well.&nbsp; According to Bloomberg data, the R-squared correlation between the daily values of these items over the three months period ending on March 14 was 0.631.&nbsp; That\u2019s good, not great, but it fits the narrative.&nbsp; When we change the period to the three months including today, the R-squared dips to .554.&nbsp; The relationship flipped on its head last week and the lower correlations reflect that.&nbsp;<\/p>\n\n\n\n<p>Some traders might see this as an opportunity.&nbsp; A linear regression shows that over the past three months, 10-Year futures have never been cheaper relative to NQ.&nbsp; Notice the red asterisk in the graph below:<\/p>\n\n\n\n<p><strong>Linear Regression Between 10-Year T-Note Futures and NQ, 3 Month Daily Data<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"975\" height=\"292\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-72.png\" alt=\"linear Regression Between 10-Year T-Note Futures and NQ, 3 Month Daily Data\" class=\"wp-image-129916 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-72.png 975w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-72-700x210.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-72-300x90.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/03\/image-72-768x230.png 768w\" data-sizes=\"(max-width: 975px) 100vw, 975px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 975px; aspect-ratio: 975\/292;\" \/><\/figure>\n\n\n\n<p><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p>This is hardly a risk-free trade though.&nbsp; The logic behind a trade of this type is that the relationship will return to the mean, but mean regression trades don\u2019t always work as planned.&nbsp; Correlation is not causation, even if the causation seems rooted in reality.&nbsp; Furthermore, this is not a particularly robust relationship and the timeframe is rather short.&nbsp;<\/p>\n\n\n\n<p>The simple explanation is probably the best one to describe the recent outperformance of stocks versus bonds.&nbsp; Although there should be a solid relationship between the two, it is not ironclad.&nbsp; The two can diverge, especially when markets are going through adjustment periods.&nbsp; The recent Fed moves and rhetoric require the repricing of assets and risks.&nbsp; Bond traders remain nervous.&nbsp; Stock traders decided that they had enough bearishness for a while and have been quick to jump on a rebound.&nbsp; This enthusiasm could certainly persist until next week\u2019s quarter end, yet it could just as easily exhaust itself without warning.&nbsp; For now, at least, exuberant stock traders are disinclined to let the gloomy bond traders dampen their mood.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>One of the market\u2019s supposed truisms is that there is a clear inverse relationship between tech stocks and interest rates.  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