S&P500 is down 6.5% since the start of January.

Nasdaq is down over 10%, the Dow 6%.

Why do stocks go down when Treasury yields (i.e. interest rates) go up?

Especially tech stocks!

Thread 👇 🧵

1/ The standard textbook explanation is this:

The Fed ⬆️ rates, this ⬆️ borrowing costs for banks and pretty much everyone else.

The story then unfolds:

Interest rates ⬆️, mortgage and credit card rates ⬆️, disposable income 🔽

2/ Now you, the consumer, are spending less money.

When you spend less, firms sell less stuff.

This in turn affects company earnings, and by extension their stock prices.

3/ Tech stocks are particularly sensitive due to the discounted cash flow (DCF) model.

It’s just a way how investors value stocks.

Anticipating what the future cash flow of tech firms is worth today.

4/ The key metric here is the discount factor which lowers the present value of future earnings.

And the discount factor reflects interest rates in the economy.

As interest rates go ⬆️ the present value of future earnings goes 🔽