Nasdaq, Dow, S&P drubbed as bonds jump
Rising yields raise concerns about the potential for inflation
Rising bond yields triggered a broad sell-off on Wall Street Thursday that erased the market’s gains for the week and handed the Nasdaq composite its biggest loss in nearly four months.
The S&P 500 dropped 2.4 percent, led lower by heavy selling in technology and communications companies. The techheavy Nasdaq fell 3.5 percent, its biggest skid since October.
The sell-off took hold when the yield on the 10-year U.S. Treasury note rose to 1.53 percent, a level not seen in more than a year and far above the 0.92 percent level it was trading at only two months ago.
Bond yields have been rising this month, reflecting growing confidence among investors that the economy is on the path to recovery, but also concern that inflation is headed higher. And every tick up in bond yields recently has corresponded with a tick down in stock prices.
Thursday’s move in the 10year Treasury yield raised the alarm on Wall Street that yields, and the interest rates they influence, will move higher from here.
“The yield on the 10-year note crossed the line in the sand at 1.50 percent, which from a technical perspective further confirms that higher rates are likely,” said Sam Stovall, chief investment strategist at CFRA.
The S&P 500 index fell 96.09 points to 3,829.34. The Dow Jones Industrial Average lost 559.85 points, or 1.8 percent, to
31,402.01. The Nasdaq slid 478.54 points to 13,119.43.
The economy grew at an annual pace of 4.1 percent in the final three months of 2020, slightly faster than first estimated. The influx of new government stimulus efforts and accelerated vaccine distribution could lift growth in the current quarter, ending in March, to 5 percent or even higher, economists believe.
“The bond market is reacting to the positive economic growth,” said Brent Schutte, chief investment strategist, Northwestern Mutual Wealth Management Company. “It means there’s some hope on the horizon.”
Technology stocks, which tend to have higher valuations, have been one of the victims of the rise in bond yields. As bond yields climb, more investors shift money into those higher yielding assets, which tends to negatively impact stocks that are priced for growth and not for regular dividend payouts.
Apple, Amazon, Facebook and Microsoft — all companies that pushed the stock market higher last year — fell 2.4 percent or more.
The market will likely see broader growth as actual economic
growth widens to include many of the sectors that have been beaten down during the pandemic, Schutte said.
Smaller company stocks fared worse than the rest of the market. The Russell 2000 index of smaller company stocks lost 84.21 points, or 3.7 percent, to 2,200.17. The index has been far outpacing larger indexes, a signal that investors expect broader growth to continue. Schutte noted improvements in retail sales, the housing market and consumer confidence.
“All those things are strong right now and the backdrop for further gains is still there,“Schutte said.
Global stock markets have soared over the past six months on optimism about coronavirus vaccines and central bank promises of abundant credit to support struggling economies.
Those sentiments have faltered due to warnings the rally might be too early and that inflation might rise.
On Wednesday, Federal Reserve Chair Jerome Powell affirmed the Fed’s commitment to low interest rates in a second day of testimony to legislators in Washington.
The central bank earlier indicated it would allow the economy to run hot to make sure a recovery is well-established following its deepest slump since the 1930s. Powell said it might take more than three years to hit the Fed’s target of 2 percent inflation.
Investors also are looking for Congress to approve President Joe Biden’s proposed economic aid plan. That includes $1,400 checks to most Americans. However, the plan faces staunch opposition from Republicans.