By Michael Wursthorn
Tech stocks rebounded from an early swoon after Federal Reserve
Chairman Jerome Powell pledged anew to support the economic
recovery by keeping interest rates low, easing concerns about the
impact of rising rates on the monthslong rally in major U.S.
indexes.
The Nasdaq Composite Index ended down 0.5% Tuesday after
earlierfalling as much as 4% earlier in the day. The index, which
led the 2020 market bounceback from the coronavirus pandemic thanks
to its concentration in shares of technology, biotechnology and
other firms promising to grow faster than the economy, has fallen
4.5% since Feb. 12.
Tuesday's swings highlight a midwinter shift in investor
appetite to real-economy sectors such as banks over the past year's
favorites. The reassessment is being driven by investor
expectations that Covid-19 vaccinations will pick up, broadening
the scope of the economic recovery to a wider range of firms. The
rise this month in U.S. interest rates is forcing a reassessment of
the risks of holding shares that have risen sharply over the past
year, intensifying longstanding valuation concerns.
The rebound following Mr. Powell's testimony before Congress
shows that while investors continue to believe U.S. stocks are the
best place to invest for the long term, sensitivity about the
impact of rising interest rates is acute.
"We're seeing a nasty, violent rotation," said Mike Bailey,
director of research at FBB Capital Partners, an investment manager
in Bethesda, Md.
The broader market rose, fueled by gains in energy, utility and
financial shares. The Dow rose about 16 points, while the S&P
500 added 0.1%.
Tuesday's early selling was heaviest in some of the shares
deemed by investors to be likely pandemic winners and
government-stimulus beneficiaries. Electric car maker Tesla Inc.
fell as much as 13% just after the open and Covid-19 vaccine
developer Moderna Inc. fell as much as 14%.
The declines moderated after Mr. Powell said in congressional
testimony that inflation remains soft, quelling fears among some
investors that the late February rise in interest rates might force
an acceleration of central-bank rate-increase plans. Instead, Mr.
Powell signaled that rates will remain low as the Fed seeks to
bolster job growth. Tesla ended 2.2% lower and Moderna closed down
5.8%.
Tech selling has reduced the altitude of some of the biggest
market winners of the pandemic, many from Silicon Valley. Some in
the market saw signs that a retrenchment might be at hand with last
month's boom and bust in shares popular on social media forums such
as GameStop Inc., which fell 2.2% Tuesday.
"A lot of the stratosphere stocks are getting dragged down,"
said Mr. Bailey of FBB Capital, "and after that the next layer down
is the expensive tech stocks like Tesla."
Indeed, the selloff is the flip side of an investment strategy
that has made the tech companies favorites among small investors
who have piled into stock and options trading over the past year,
with the Nasdaq rising 44% in 2020 and setting 12 closing records
in 2021.
But over the past month, Apple Inc. has fallen 9.5% and food
delivery service DoorDash Inc. has declined 10%. Tesla, whose 743%
surge last year highlighted the tech-led market rebound from the
coronavirus selloff, is now down for 2021 and has lost around a
quarter of its value since the electric-car maker said on Feb. 8
that it had spent $1.5 billion on bitcoin in an effort to boost
returns on cash. The market reversal has extended beyond those
firms into some of the biggest gainers from the work-from-home
trend forced by Covid-19 restrictions, such as home-improvement
retailers Home Depot Inc. and Lowe's Cos. On Tuesday, Home Depot
fell 3.1% after the Atlanta company said same-store sales, a
measure adjusted for store count, would be flat to slightly up this
fiscal year, compared with a 20% rise in the fiscal year that ended
last month. Lowe's fell 2.2%.
Smaller stocks, also a recent winner as investors bet that
locally oriented U.S. firms would benefit from stimulus-fueled
infrastructure spending, also tumbled. The Russell 2000 index of
small stocks fell as much as 3.6% Tuesday before rallying to finish
down 0.9%, deepening its slide this week to 1.6%. The index had
risen 44% over the past six months, raising valuation concerns
there as well.
The selling of the past week amounts to a "valuation reset for
both small-caps and tech, considering the epic tear of both asset
classes," said Jason Bulinski, chief investment officer at First
Midwest Bank.
Those concerns were pronounced enough to overcome what on
another day could have been welcome news from the Fed. Mr. Powell
signaled in prepared testimony before Congress that despite signs
of recovery since the pandemic began, "the economy is a long way
from our employment and inflation goals."
Investors took the comment as a sign that any Fed interest-rate
increases are "still several years away," said Paul Ashworth of
Capital Economics. The moderate tone softened the rush into banks,
with the Nasdaq KBW Bank index of major U.S. lenders rising 0.9%.
It is up 19% for 2021.
The shift away from pandemic favorites has offered a reminder of
the risks of more-volatile investments. FBB Capital has been
cautious on stocks and has been buying corporate bonds as one play
on the changing environment, Mr. Bailey said. Michael Scanlon, a
portfolio manager of the John Hancock Balanced Fund at Manulife
Investment Management, has scaled back his fund's equity holdings
and has been selectively buying high-yielding investment grade
corporate debt.
Yet rates remain low, the Fed remains on hold and inflation has
yet to appear. Because of that, many investors are wagering that
the selloff will soon pass and that the tech highfliers of recent
years are due to resume their ascent.
Mr. Scanlon said his fund holds sizable stakes Microsoft Corp.,
Google parent Alphabet Inc. and Broadcom Inc.
"In this environment, you still want to own companies with
dominant market shares and the ability to grow," said Mr. Scanlon.
"I don't think that trade suddenly expires."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
February 23, 2021 18:36 ET (23:36 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
Tesla (NASDAQ:TSLA)
Historical Stock Chart
From Aug 2024 to Sep 2024
Tesla (NASDAQ:TSLA)
Historical Stock Chart
From Sep 2023 to Sep 2024