The booming technology trade that helped lift the market to new highs during the pandemic continues to unwind Thursday as Treasury yields spike further on dovish comments from the Federal Reserve, which experts believe could be fueling concerns over rising inflation and lower stock-market valuations.
Shortly after the market open, the Dow Jones Industrial Average, which closed above 33,000 points for the first time Wednesday, ticked up 65 points, or 0.2%, while the S&P 500 fell 0.7% and the tech-heavy Nasdaq plunged 1.7%.
Yields on the 10-year Treasury–a bellwether of investor sentiment in equity markets that moves inversely to stocks–surged 10 basis points Thursday morning to roughly 1.75%, their highest level since January 2020.
Big tech stocks–which have fallen as much as 10% from their mid-pandemic highs last year–are still catching a lot of the heat from rising yields, with Amazon, Alphabet, Facebook and Apple all down roughly 1%, while Tesla sinks 2.5%.
On the other hand, cyclical stocks that tanked at the height of pandemic uncertainty continue to outperform the market: energy company PPL, cruiseliner Carnival and insurance firm Lincoln National are all up between 2% and 3% Thursday morning.
On the earnings front, shares of Dollar General, which surged more than 40% to a record high last year, are falling 5% after the retailer posted lower-than-expected earnings for the fourth quarter and warned that a post-Covid return to normal would tank the firm’s sales more than it previously thought.
Meanwhile, the Labor Department reported that there were 770,000 new jobless claims last week–climbing sharply from the week prior and coming in worse than economists feared as layoffs continue to hit service industries particularly hard.
“Yields are surging this morning as the Fed threw caution to the wind and kept policy at max accommodation despite the markedly improved macro backdrop,” Vital Knowledge Media Founder Adam Crisafulli said in a note Thursday. “The market’s reaction with regards to the Fed is evolving–a dovish, or accommodative, stance being positive has defined the equity relationship to monetary policy for years, but that no longer may be appropriate as accommodation fuels inflation expectations and drives yields higher, thus undercutting the S&P’s multiple.”
Yields on the 10-year Treasury have soared more than 125 basis points since their pandemic low in July. Higher returns on the risk-free asset class have heightened concerns over sky-high tech valuations and pushed the Nasdaq down about 5% from a February high. Over the same period, the S&P is up about 0.5%, and the Dow has soared more than 5%. The Fed on Wednesday said it expects the economy to run hot this year, with projected GDP growth of 6.5% (compared to a 3.5% decline last year) and year-end unemployment of 4.5% (compared to 6.2% last month). To help bolster that growth, the central bank says it will leave the Federal Funds rate near 0%.