Chart of the week

FANG–interest rate correlation turns more negative

Tech stocks have had a topsy-turvy 2021. Our chart looks at their correlation with rates, highlighting the importance of flexibility.

April 16, 2021 | 2 minute read

FANG+ correlation to 10-year U.S. Treasury yield (rolling 30-day)

Source: Bloomberg Finance, L.P., FS Investments, as of April 15, 2021. FANG+ represented by the NYSE FANG+ Index, a market cap-weighted index of Apple, Alphabet, Amazon, Facebook, Netflix and Microsoft.

  • While fixed income investments have been front and center for many investors concerned about the impact of rising interest rates, equity markets have also felt rates’ impact.
  • Headline returns for the S&P 500, of course, remain strong. Yet market leadership this year has been a mirror image of last, when tech was a clear leader, as growth-oriented technology names have underperformed amid today’s higher interest rate environment.
  • Put another way: Markets are still strong, but tech stocks have shown a sense of fragility in recent months as interest rates have risen.
  • The chart shows FANG+ stocks’ correlation to the 10-year U.S. Treasury yield.1 The correlation remained mostly positive into November 2020, meaning FANG+ stocks rose along with the 10-year yield.
  • As rates have since begun to climb more sharply, however, this correlation has turned increasingly negative—that is, FANG+ stock prices fell as rates jumped.
  • While the speed and direction of future interest rate moves remain up for debate—rates have settled in April, for example, prompting tech to outperform again—their impact on growth stocks in general and large-cap tech stocks in particular has been notable.
  • With this in mind, active investment strategies that allow for significant flexibility between growth-value and cyclical-defensive stocks may offer investors the potential to take advantage of rapidly changing market conditions.

  • Bloomberg Finance, L.P., FS Investments, as of April 15, 2021. FANG+ represented by the NYSE FANG+ Index, a market cap-weighted index of Apple, Alphabet, Amazon, Facebook, Netflix and Microsoft.

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