How to navigate investing in tech stocks amid volatility

Michael Arone, State Street Global Advisors chief investment strategist, joins Yahoo Finance to discuss concerns in the rise of treasury yields and its effects on stocks.

Video Transcript

MYLES UDLAND: As we think back to what March 2020 was like, let's hope 2021 doesn't have the same kind of surprises and changes in store for us here. But it's certainly been an eventful year so far in markets. And joining us now to talk more about the big rotation trade, how far it can go, is Michael Arone. He's the State Street Global Advisors Chief investment Strategist for the US SPDR Business.

Michael, thanks so much for joining the show. Let's start with what we've seen in the last couple of weeks. You know that the change in the 10-year is within the top 1% of all two-week changes that we've seen through history.

Certainly to be expected that we're not going to continue going up in a straight line with yields. But you don't really think, it seems from my reading your notes, that-- that this is the end for the move higher in yields. Where do you expect this kind of trade to go over the next, let's call it a couple of quarters?

MICHAEL ARONE: So Myles, I think you just hit it perfectly in that it is in the top 1% of two-week moves in terms of the 10-year Treasury over the last decade. So the fact that we're pausing here early this week and investors are breathing a sigh of relief in combination with the J&J vaccine news and progress being made on the stimulus isn't a surprise. But what's interesting is that the US 10-year Treasury yield is kind of the lone holdout and remains well below its pre-pandemic figure.

That number was a little more than 1.9%. We know this morning we're in the low 1.40s. And the market really started to struggle when we hit around 1.6%. So I don't think it's about kind of interest rates generally, I think it's about real interest rates.

And so what's happened in the last couple of weeks is that once you start hitting that 1.5%, 1.6% level on US 10-year treasuries, now you have a real interest rate. You're above the CPI level, excluding food and energy of around 1.4%, and this starts to have some negative impacts and financial tightening conditions in markets. And we saw that in some of the volatility last week.

JULIE HYMAN: So is that going to continue then to matter? I mean, it looks like stimulus, to your point, is going to get passed, right. Do you think that we'll continue to see yields then have a resurgence? And can yields be high while stocks continue to go up? Or I guess the flip side of that, is this going to continue to be an impediment for stocks if we see yields continue to climb?

MICHAEL ARONE: I don't think it'll be an impediment for stocks to move forward as long as we see a move that's commensurate on the economy. So if the economy continues to accelerate, rebound, earnings figures continue to come in solidly, I think that will allow us to tolerate higher interest rates. I think the real concern is that if the economy begins to slow down or the recovery isn't as robust as expected, I think that'll be the real challenge. And I do think, Julie, it's really about those real interest rates. They can't accelerate too much given the debt dynamics, both in the public [INAUDIBLE] framework and in the private.

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BRIAN SOZZI: There you have the opening bell on Wall Street, EV play ChargePoint ringing that opening bell. Michael, I want to go look at tech stocks. Tech stocks have underperformed the past two weeks with that rise in yields. Is it now time for investors to start dipping their toe back in the water there?

MICHAEL ARONE: What we've been kind of suggesting all year long is that it's not really about kind of cyclical value or secular growth. It really is about cyclical value and secular growth. So we think you need to either barbell these two items or balance them, whatever terminology you want to use.

So we do anticipate that the cyclical value stocks will maintain leadership in the near term as the economy recovers, rates pick up, inflation picks up. However, beyond the next year or so, debt, deficits, demographics, and the disinflationary forces of technology will limit how high economic growth can get, how high rates and inflation can get. And in that environment, you want secular growth companies, high organic growth rates, compound cash flow, sustainable competitive advantage, and those that can disrupt different industries from that standpoint.

Now from our perspective, the regulatory spotlight will shine more brightly on FANG, and they're likely to have greater challenges. So we have been suggesting folks access technology down the market cap spectrum and really think about those exponential growth stories within kind of cloud computing, storage, and those areas, kind of the next Apples, the next Facebooks, from that standpoint.

MYLES UDLAND: Yeah, Michael, how are you guys also thinking about some of the, let's call them alternative opportunities that are out there in the markets and that investors are quite excited about, whether it's SPAC, whether it's cryptocurrency? You know, you guys are mostly focused on-- on the plain vanilla US equities and how those, you know, can kind of get-- get rejiggered within a portfolio. But certainly that is a part of the conversation now. How are you guys at least thinking about that or taking note of that, even if it is kind of off to the side of your core focus?

MICHAEL ARONE: Well, I think it's an example of some of the speculative excess that's in the markets in terms of all the liquidity that's out there. So to me, it's-- we're not in a bubble environment, but there's certainly some red flags to suggest that some of these things-- so Bitcoin, you think about this kind of new brazen investor class that's really benefited from the intersection of technology, zero commissions, and fractional trade sharing, being able to trade in fractional shares.

So I think that from my perspective all the money raised in special purpose acquisition companies, this just signals to me an element of market toppiness from a concern. So I'm watching it more as a risk component than a return component from that standpoint. When people invest in Bitcoin, it is on the greater fool theory.

It's not a store of value. They're not seeking to hedge their portfolio against risks. They're seeking to speculate and maximize return. It's a very different dynamic than some of the things that we have on offer, like gold.

MYLES UDLAND: All right, Michael Arone is the Chief Investment Strategist for State Sleet-- State Street Global Advisors US SPDR Business. Michael, I appreciate the time this morning. I know we'll talk soon.

MICHAEL ARONE: Thanks.