Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date! Impact of Interest Rates on Growth Software Stocks Many people have asked why rising interest rates effect software stock prices, so I thought I’d do a quick explainer. The TLDR - it’s all about capital flows. At a very high level there are many very large capital allocators (think tens / hundreds of billions, and even $1T+ of dollars managed) that allocate their investments across a diversified universe of financial instruments (stocks, bonds, real estate, etc), each with different risk profiles. The goal is that the overall risk profile / return profile of each asset class they invest as a basket portfolio will generate a target investment return rate. Software stocks fall squarely in the “risk asset” category. Some years they may return 20%+. Some years they may loose money. The variability is high, thus they’re “risky.” When we look at bonds or fixed income financial instruments, the risk is much lower (and in theory 0 when looking at government bonds — risk free). Many of these bond rates track government interest rates.
Clouded Judgement 10.1.21
Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date! Impact of Interest Rates on Growth Software Stocks Many people have asked why rising interest rates effect software stock prices, so I thought I’d do a quick explainer. The TLDR - it’s all about capital flows. At a very high level there are many very large capital allocators (think tens / hundreds of billions, and even $1T+ of dollars managed) that allocate their investments across a diversified universe of financial instruments (stocks, bonds, real estate, etc), each with different risk profiles. The goal is that the overall risk profile / return profile of each asset class they invest as a basket portfolio will generate a target investment return rate. Software stocks fall squarely in the “risk asset” category. Some years they may return 20%+. Some years they may loose money. The variability is high, thus they’re “risky.” When we look at bonds or fixed income financial instruments, the risk is much lower (and in theory 0 when looking at government bonds — risk free). Many of these bond rates track government interest rates.
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