Stocks Cap Losing Week as Bond Yields Jump
February 26 2021 - 6:32PM
Dow Jones News
By Paul Vigna and Caitlin Ostroff
Rising bond yields blunted U.S. stocks' market momentum this
week despite signs of an improving American economy.
On Friday, the Dow Jones Industrial Average fell 469.64 points,
or 1.5%, to 30932.37, dropping 1.8% for the week. The S&P 500
fell 18.19 points, or 0.5%, to 3811.15, down 2.45% for the
week.
The tech-heavy Nasdaq Composite, which has risen farther than
its peers since last March and has been particularly driven by
momentum traders, suffered a bigger loss this week. It fell 4.9% on
the week, its worst percentage loss since the week ended Oct. 29.
On Friday, it rose 72.91 points, or 0.6%, to 13192.35.
Government spending and the Federal Reserve's aggressive
monetary policy have supported the stock market during a tumultuous
year. But those two sources of stimulus are now fueling inflation
bets and sparking a bond selloff. When bond yields were at their
lows, they offered investors virtually no returns or even negative
returns after inflation. The lack of returns on bonds drove
investors to stocks, pushing valuations to their highest point in
years. Now that bond yields are rising, those richly valued stocks
look less attractive.
"Everything is divorced from the risk in those instruments.
Everything is mispriced," said James Athey, senior investment
manager at Aberdeen Standard Investments. "Markets are increasingly
dominated by momentum."
Yields on Treasurys, considered among the safest assets to own,
have been rising in recent days as money managers bet on a rapid
economic rebound. The yield on the 10-year Treasury ticked down to
1.459% on Friday, from 1.513% on Thursday, its highest closing
level in a year.
For the month of February, the 10-year yield rose 0.369
percentage points. That is the largest one-month increase in the
yield since November 2016.
Expectations among some investors that inflation will climb
sharply prompted concern that the Fed may increase interest rates
sooner than previously anticipated, which could potentially boost
borrowing costs and weigh on economic growth.
"What has happened in recent weeks is the markets have had to
reprice expectations of the Federal Reserve's rate hikes," said
Dwyfor Evans, head of macro strategy for the Asia-Pacific region at
State Street Global Markets in Hong Kong.
He said the pickup in bond yields would have a knock-on effect
on areas such as corporate lending and mortgage rates. "That is why
equities will come under pressure here, because rising yields will
have some impact on the real [economy] and earnings might have to
slow," Mr. Evans said.
Peter Boockvar, chief investment officer at Bleakley Advisory
Group, said the rise in bond yields has left the Fed with only a
few options. The central bank can either fight the bond market by
ramping up its bond buying, abandon its dovish policies, or do
nothing and hope it goes away, he said. All options would have
different ramifications for the markets and economy, and that is
making life difficult for investors.
This is all coming at a time when the economic picture appears
to be improving. The rollout of Covid-19 vaccines, a fresh fiscal
stimulus package promised by President Biden and the Fed's pledge
to keep its easy-money policies in place have buoyed sentiment for
many weeks.
Fresh federal data released Friday showed that U.S. consumer
spending increased 2.4% in January after household incomes jumped
10%, mainly on the latest round of stimulus checks. Investors
expect Congress to pass another fiscal aid package in the coming
weeks.
That money should at some point lead to more spending -- and
more economic growth. That, in turn, should bolster corporate
earnings.
Among corporate names, Salesforce was down 6.3% to $216.50 after
the company delivered earnings guidance that was below
expectations, despite a strong fourth-quarter report.
Tech leaders Apple, Amazon, Facebook and Tesla all fell over the
five days. For the week, Apple lost 6.6%, Amazon fell 4.8%,
Facebook slipped 1.5% and Tesla dropped 14%.
The ICE U.S. Dollar Index, which tracks the greenback against a
basket of currencies, rose 0.8%. Investors view the dollar as a
safe asset and flock to it when stocks decline.
Write to Paul Vigna at paul.vigna@wsj.com and Caitlin Ostroff at
caitlin.ostroff@wsj.com
(END) Dow Jones Newswires
February 26, 2021 18:17 ET (23:17 GMT)
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