Tech stocks led the broader market down for a second day on Tuesday, amid higher interest rates and a rotation in stocks more linked to the economic rebound.
The Nasdaq Composite fell 1.4% for the first time since November 3, falling below its 50-day moving average, a key technical indicator. The S&P 500 fell 0.4% while the Dow Jones Industrial Average fell 70 points to its lows after 360 points.
Stocks rebounded from their lows after Federal Reserve Chairman Jerome Powell told Congress in his testimony that inflation is still “weak” and the economic outlook is still “highly uncertain”, which is what concerns a change in policy by the central bank.
“The economy is far from our employment and inflation targets, and it will likely take some time to make significant further progress,” said the Fed chief in prepared remarks for the Senate Banking Committee.
Fears of inflation have risen in recent weeks amid a sharp rise in bond yields as policy makers debated another round of economic relief. Investors fear that a price hike due to government incentives could force the central bank to raise short-term borrowing costs.
“The Fed is focused on employment and appears very poised to absorb higher inflation and excesses in the financial market, creating financial instability in hopes of getting there,” said Peter Boockvar, chief investment officer of the Bleakley Advisory Group , in a note. “But as can be seen at the long end of the yield curve, the markets have a say in this too and speak loudly. Hopefully the Fed officials will listen at some point.”
Tech stocks, the most vulnerable to higher interest rates, have sold out in the past few days. Investors also rushed to book profits on these pandemic winners, whose valuations have reached historically high levels.
Tesla was trading 4% lower after previously falling 13% after falling 9% in the previous session. Apple lost 1.7% after falling 3% on Monday. The iPhone maker’s stock is down about 11% over the past month.
Small caps also came under pressure as the Russell 2000 fell 1.9% on Tuesday and rose 6.5% in February. Those shabby value shares outpaced the S&P 500 in 2021 amid optimism about the vaccine launch and economic reopening.
“The sell-off of tech darlings and popular small caps could be interpreted as the beginning of market volatility,” said Chris Larkin, chief executive officer for trading and investing products at E-Trade. “It’s not to say that stocks have run their course, it’s more that cyclical sectors like energy and finance are more attractive as technology takes a back seat.”
The 10-year government bond yield, which has been rising steadily since early 2021, remained steady at 1.36% on Tuesday. So far this month the key rate has risen by an impressive 28 basis points. The 30-year yield hit a year-high of 2.2% on Monday. One basis point is 0.01%.
The losses incurred during Tuesday’s session contributed to growing divergence between key areas of the market. The tech-heavy Nasdaq Composite, which fell 2.5% on Monday, is down about 4% this week.
The Dow, which comprises a larger proportion of cyclical stocks, is down a far more modest 0.1% since Friday’s close as investors pick up names they believe will benefit from an economic rebound. Energy and finance – two of the best performing sectors this year – again supported the market on Tuesday.
Jonathan Golub, chief strategist at Credit Suisse in the US, believes cyclical stocks will take the market to new highs as the year progresses, driven by the upside in earnings and optimism about the economic reopening.
“Rising interest rates – a benefit to finance – and copper and oil prices – a boon to industry, energy and materials – further reinforce this favorable backdrop,” Golub said in a statement on Tuesday.
Credit Suisse increased its S&P 500 year-end target from 4,200 to 4,300. The new forecast corresponds to an 11.5% rally.
