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Microsoft Stock Slides, Leading Big Cap Tech Names Lower, As Fed Meeting Looms
By: TheStreet | December 14, 2021

• Risks of an over-reaction by the Fed to searing inflation, in the form of faster rate hikes, has hit big cap tech stocks hard this week ahead of tomorrow's crucial policy decision in Washington.

Microsoft (MSFT) shares slumped lower Tuesday, on pace for their biggest one-day decline of the year, as investors dump big cap tech stocks ahead of tomorrow's key Federal Reserve policy meeting while tracking the impact of the newly-identified Omicron variant.

Microsoft is one of a small group of stocks -- along with Apple (AAPL), Google (GOOGL) and Nvidia (NVDA) -- that have powered nearly 70% of the S&P 500's total returns over the past six months. However, with the Fed looking to quicken the paring its $120 billion in monthly bond purchases, and investors accelerating bets on near-term rate hikes, heavyweight tech stocks are starting to fall out of favor heading into the final weeks of the trading year.

The CME Group's FedWatch tool, in fact, is showing an 56.8% chance of a rate hike in May of next year, up from around 35% at the beginning of November. Two more hikes in 2022 are also priced in by interest rate traders

Producer price inflation, the Commerce Department said Tuesday, accelerated at 9.6% clip last month, the fastest pace in nearly four decades and a reading that largely echoed a similarly-searing headline number from last week's November CPI report.

The gains, whether driven by supply chain disruptions, energy price surges or tight labor markets -- or some combination of the three -- have had an outsized impact on the Nasdaq, and tech stocks in general, given that most are either cash-rich or growth-focused and thus sensitive to interest rate changes.

The Nasdaq has fallen around 4.7% over the past month, as inflation expectations have intensified and bets on June Fed rate hike accelerated compared to 1.3% decline for the S&P 500.

“Worries about the Omicron variant and growing expectations of a more aggressive response from the Fed to higher inflation have taken some of the shine off US investor sentiment in December," said Chris Williamson, executive director at IHS Markit. "Sector preferences therefore pivoted away from tech stocks towards defensives such as consumer staples."

Microsoft share were marked 4.1% lower in late-morning trading Tuesday to change hands at $325.48 each, a move that would still leave the stock with a six-month gain of around 25%. Google parent Alphabet fell 2.5% to $2,842.10 each while Apple, fresh off an all-time high in early trading Monday, was marked 1.7% lower at $172.80 each.

Bank of America's closely-watched Global Fund Manager Survey, a poll of investors controlling more than half a trillion dollars worth of assets, snow that many have cut their exposure to tech stocks to the lowest levels in a year, citing the Fed -- and not Omicron or Covid -- as the market's biggest 'tail risk'.

A dovish statement from the Fed Wednesday could trigger an end-of-year rally in unprofitable (ie growth-oriented) tech stocks and cryptocurrencies, the survey indicated, while a more hawkish take could seen more fund managers parking their assets into cash.

"Wednesday's Fed meeting is critical, as it's running low on options after waiting too long to begin tightening policy," said Danielle DiMartino Booth, CEO and chief strategist of Dallas-based Quill Intelligence.

"While it's rare to make changes to policy at December meetings, the Fed is under tremendous pressure given the persistence of elevated inflation to expedite its previously announced tapering at a minimum," she added.

Bond markets, it seems, are pricing in an added risk that could also whack tech stocks: Fed over-reaction.

The gap between 2-year and 10-year note note yields has narrowed -- or 'flattened' -- to just 78 basis points, a move that suggests fixed income investors expect the Fed to slam on the brakes to tame inflation with higher interest rates that could slow economic growth.

"Inflation at a nearly 40-year high is not something the Federal Reserve can ignore. While gas prices are starting to decline, there is still plenty of food inflation," Booth added. "There is risk now that inflation has become entrenched in households’ psyches, which further pressures policymakers at the Fed to be more aggressive in their tightening stance."

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