Stocks fall the hardest since October — Here’s how investors can position their portfolio

Investors were reminded of a shocking fact: stocks do not only go up as growth stocks — tech in particular — saw their biggest daily drop since October.

Over the past year, historically low interest rates have pushed investors looking for higher returns into the stock market — sending stock prices to record highs.

Blame it on the rates

The 10-year Treasury yield, the interest rate on government loans, is a widely used indicator of investor confidence in the economy. Rising rates typically indicate a recovering economy but they could also be bad for stocks:

• Higher borrowing costs for businesses leads to lower profits
• More incentive for investors to move money away from stocks into bonds, which now have a higher interest rate

Since August, the rate increased from a low of 0.52% to 1.37% this week. Tech stocks, which are more sensitive towards higher rates, often have the most to lose from rising rates.

The sudden rise in the 10-year treasury yield this month sparked a sell-off in growth stocks. In the past 2 weeks:

• The best-performing sectors were energy, financials and materials.
• The worst-performing sectors were tech, utilities and healthcare.

What’s keeping growth investors up at night…

Growth stocks were beaten up pretty badly this week but here’s how things could get worse:

• According to J. Bryant Evans of Cozad Asset Management, if the US 10-year rate reaches 3%, bonds could become more attractive — which could lead to a bigger outflow of cash from stocks.
• According to Paul Nolte of Kingsview Investment, less stimulus support from the US central bank — which has flooded the market with billions — could also send stocks lower.

But on Feb. 23, Federal Reserve Chairman Jerome Powell signaled that the central bank was nowhere close to pulling back stimulus. With the rate at 1.37% and no plans to stop the stimulus tap, tech stocks may have room to continue their run, just at a slower pace.

For investors… Switch to opening mode

Here’s what investors could diversify into as interest rates continue to rise:

• Banks and financial institutions benefit from higher rates, which means higher interest received by banks on loans
• Sectors that benefit from an economy opening up — i.e. industrial, travel and airlines

According to Datatrek, when tech stocks crashed in the years 2000/2001, investors moved the most capital to financial, healthcare and industrial stocks. Given the recent fall in tech stocks and rise in financials/industrials stocks, we may be seeing a similar rotation.

Learn more: What is the difference between growth vs. value stocks?