Tuesday is looking like a good day for investing in tech stocks, as shares of edge cloud provider Fastly (FSLY -2.47%) gains 2.5%, TV streamer Roku (ROKU -2.69%) picks up 4.4%, and online shopping tech company Shopify (SHOP -4.79%) leads the pack higher with a 5.5% gain. Stock-specific news explaining the rising share prices is in short supply today. There is, however, a big macroeconomic news item that's likely to affect the growth prospects for all sorts of tech companies in the months ahead.
This morning, the Federal Reserve's Federal Open Market Committee (FOMC) will decide whether to raise rates by 75 basis points (or more) or 50 basis points (or less). And tomorrow investors will hear the decision -- and maybe some comments on what the next Fed rate hike will look like.
Why are the Fed's targeted interest rates important to tech stocks?
Inflation is high right now, and the Federal Reserve thinks the U.S. economy is running too hot. To tamp down the flames, it's spent most of this year raising rates and tightening the spigot on money flowing into the economy. Indeed, from a targeted interest rate of 0.25% to 0.5% at the start of the year, the Fed has raised rates by 300 basis points already, to a range of 3% to 3.25%. The idea is that, as interest rates on debt rise, consumers and companies will borrow less and spend less, lowering demand for goods and services.
When demand falls, prices fall, too -- and that's how the Fed intends to lower inflation.
The problem is, the Fed's plan to slow down the economy aims to slow down the economy! That's not necessarily something that investors in growth companies want to see happen. It's a big part of the reason why shares of Fastly stock are down 83% over the past 12 months, why Roku stock has fallen 82%, and why Shopify is down 77%.
That explains why investors in growth-hungry tech stocks wouldn't want to see interest rates rise. But right now, CME FedWatch is projecting that the Fed will raise interest rates, and 81% of experts polled are expecting a 75 basis-point rate hike, rather than a more moderate 50-basis-point hike. So why are tech investors bidding their stocks higher if tomorrow will most likely bring news of another 75-basis-point hike?
Two reasons: First, the higher interest rates go, the closer the economy will presumably get to the point at which the Fed decides rates have gone high enough and stops hiking. That's the announcement that growth investors are looking forward to, and each FOMC meeting brings with it the chance that today will be the day the Fed stops hiking. There's also the possibility that the Fed will both choose to raise rates a modest 50 basis points tomorrow and give commentary that it's approaching the point at which it halts hikes altogether.
That's two chances for good news tomorrow. And two chances for bad news as well, but right now, it seems tech investors are betting on the former.