US stocks fell on Monday as a steady rise in bond yields hurt appetite for risk-weighted assets, particularly growth technology stocks.
The Dow Jones Industrial Average fell 120 points. The S&P 500 lost 0.7%, led by technology and consumer discretionary. The Nasdaq Composite fell 1.1%.
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.
Tesla stock lost 3% after falling 4% last week. Big tech stocks came under pressure as Apple, Amazon, Microsoft, Netflix and Alphabet traded at least 1% less.
The yield on 10-year government bonds rose last week by 14 basis points to 1.34%, the highest level since February 2020. The reference yield rose on Monday by a further 3 basis points to 1.37%. So far this month the reference rate has risen by 28 basis points. 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.
Meanwhile, many on Wall Street believe 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 goes into the last week of February with solid gains. The Dow and S&P 500 are up more than 5% this month, while the Nasdaq is up 6.2%. The small-cap Russell 2000 outperformed this month, up 9.3%.
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.
The airline’s shares rebounded after Deutsche Bank upgraded several stocks. American Airlines rose more than 7%.
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