There is some conventional wisdom as it pertains to how interest rates affect stocks. For example, the real estate and utilities sectors are viewed as negatively correlated to 10-year Treasury yields. That explains why those sectors struggled last year.
Likewise, growth stocks, owing to longer-dated cash flows, are vulnerable to rising rates. That much was on display in 2022 when the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) shed 32.6% as the Federal Reserve unleashed multiple rate increases.
The other side of that coin is that growth-heavy ETFs such as QQQ and QQQM could potentially be positively responsive to lower rates. It remains to be seen if the Fed lives up to its end of that bargain. But history suggests more accommodative monetary policy is often accretive to the fortunes of growth stocks.
Assessing Rates’ Effects on QQQ, QQQM
It’s not solely the result of rate expectations. However, it’s worth noting that QQQ and QQQM are higher by 6.7% year-to-date. To the credit of those ETFs, the gains were extended even among speculation that the Fed will not reduce borrowing costs at its March meeting.
Indeed, it’s a positive for investors that any stock or ETF they’re considering isn’t solely reliant on the Fed. After all, the central bank can surprise, sometimes for the worse. Still, there are reasons to believe lower rates could boost QQQ and QQQM.
“The value of companies with low or negative cashflows is therefore almost exclusively determined by its terminal value, which increases as interest rates decline,” noted Finomial’s Nicolas Rabener. “Most technology and almost all biotech stocks do not pay dividends. And should therefore have benefitted from declining interest rates in the last decade, and been negatively impacted by rising rates in 2022.”
QQQ and QQQM track the Nasdaq-100 Index (NDX). The funds allocate nearly 51% of their respective weights to tech stocks. Additionally, approximately half of the ETFs’ healthcare holdings are classified as biotech stocks. Translation: Should the Fed oblige with lower rates, QQQ and QQQM are among the logical potential beneficiaries among broad market ETFs.
The good news is QQQ and QQQM don’t need lower rates to trend higher. In fact, the relationship between stocks and rates isn’t as strong as some market participants believe it to be.
“Another way of demonstrating the weak relationship between these two variables is by looking at valuations. Investors frequently justify the high equity multiples of U.S. stocks of the recent decade by declining interest rates through the quantitative easing policies of the U.S. Fed, but the ECB and BoJ had more aggressive programs that did not lead to high valuations,” concluded Rabener.
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