Heavy losses in technology stocks weighed on the S&P 500 on Monday as a steady rise in bond yields dampened appetite for growth stocks. Meanwhile, investors in economically sensitive names piled up to bet on a comeback.
The broad equity benchmark lost 0.5% in volatile trading and fell for the fifth straight year on weakness across technology and consumer staples. The Nasdaq Composite fell 2.2% as Tesla stock fell 7%. Big tech stocks came under pressure, with Apple, Amazon and Microsoft all falling at least 2%.
The Dow Jones Industrial Average reversed a 200 point loss and traded 90 points higher with a jump in a handful of economic comeback games. Disney rose more than 4%, while industrial giant Caterpillar and chemical company Dow Inc gained 4.1% and 3.3%, respectively. American Express and Chevron also raised the blue-chip Dow.
Some equity investors have been increasingly concerned over the past few weeks about rapidly rising government bond yields as they could hurt especially high-growth companies that rely on easy borrowing while reducing the relative attractiveness of stocks.
The 10-year government bond yield rose again to around 1.36% on Monday, after rising 14 basis points last week to its highest level since February 2020. So far this month the key rate has risen by 27 basis points. The 30-year yield hit a year-high of 2.2% on Monday. One basis point is 0.01%.
“This movement in returns should be watched closely by investors,” said Matt Maley, chief marketing strategist at Miller Tabak, in a note. “Just because long-term interest rates are extremely low on a historical basis, we don’t think they need to rise as much as most experts believe … before they affect the stock market.”
All eyes will be on Federal Reserve Chairman Jerome Powell as he gives his semi-annual testimony on the economy to the Senate Banking Committee on Tuesday. His comments on rates and inflation could set the market direction for the week.
In a speech on Monday, the President of the European Central Bank, Christine Lagarde, said that the central bank “is closely monitoring developments in long-term nominal bond yields”. European government bond yields fell on her remarks.
Many on Wall Street still believe that the rise in bond yields is a sign of growing confidence in the economic recovery and stocks should be able to absorb higher interest rates on strong gains.
“We don’t see the recent surge in returns as a threat to the bull market,” said Keith Lerner, chief market strategist at Truist, in a note. “Given that we are in the early stages of an economic recovery, monetary and fiscal policies remain supportive, and the strong recovery in earnings and cheap relative valuations maintain our overweight position on equities.”
The move on Monday came after the S&P 500 and Nasdaq Composite posted a two-week winning streak last week, losing 0.7% and 1.6% respectively. The blue-chip Dow was up 0.1% over the same period, supported by Caterpillar and JPMorgan.
The market started the last week of February with solid gains. The Dow and S&P 500 are both up about 5% this month, while the Nasdaq is up 4.5%. The small-cap Russell 2000 performed better this month, up 9.6%.
On the pandemic, the White House said it expects to ship millions of delayed coronavirus vaccine doses this week after a widespread winter storm disrupted logistics. Governor Andrew Cuomo said Sunday that a New York resident tested positive for the variant of Covid-19, which was first identified in South Africa.
Airline stocks rebounded after Deutsche Bank upgraded several names in the industry to buy ratings. American Airlines rose more than 11%.
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