US Stocks Slide as Bond Yields Surge, Nasdaq Down 3%

19 Mar 2021 · 3rd Party Analysis

US Stocks Slide as Bond Yields Surge, Nasdaq Down 3%


In Summary

  • Tech shares drag down the Nasdaq and the S&P500
  • Banking sector outperforms as investors fear rising borrowing costs

US equity markets went through another rough day on Thursday as main benchmark indexes closed in the red, led by the Nasdaq Composite which plummeted over 3%. Alongside the drop in stocks, long-term government bonds also fell sharply.

The fall came in the first trading day after the US Federal Reserve decided to leave short-term interest rates unchanged near zero, while it raised its growth and inflation expectations. The tech-focused Nasdaq Composite ended the session down 3.02%, or 409.03 points, to close at 13,116.17. A day after clinching a record, the broad S&P500 index slid 1.48%, or 58.66 points, to a close of 3,915.46. The Dow Jones Industrial Average slipped 0.46%, or 153.07 points, and closed at 32,862.30. Even though futures tied to the benchmark indexes showed a moderately high open of about 0.50% in premarket trading on Thursday, investors retreated from risk assets during regular trading while bond yields surged. The 30-year Treasury yield climbed 6 basis points and reached a session high of 2.5%, the highest since August 2019, while the 10-year rate spiked 11 basis points and broke above 1.75%, the highest since January 2020.

Tech stocks disappoint

Technology shares dragged down the market as the spike in bond yields renewed concerns about stock valuations, especially for growth-oriented large-cap companies. High-growth stocks such as Tesla, Apple, Facebook, Amazon, Google, all closed sharply lower. Tesla slipped 6.93% as the stock shed nearly $50 from its opening price just above $700 to a close of $653. Apple, Amazon and Netflix fell at least 3% a piece. Facebook gave up 1.92%, while Google erased 2.92% of its market cap.

The higher yield environment is spooking investors in big tech companies because borrowing costs for businesses and individuals will go up and that means high flyers look less valuable compared with companies set to benefit from a rebound in the economy. The tumultuous events in the bond market and the expectations of rising rates are once again causing investors to reprice the valuation of their shares and to rotate from the tech sector, which is growth-focused, to companies that are poised to get a boost once the economy reopens. In this regard, bank stocks outperformed as higher interest rates suggest better profit margins for banks. Rising borrowing costs are not a primary concern for banks as they can earn from the gap between the rate they borrow in the short-term and the rate they lend out at in the long-term. On Thursday, as the market sold off, Bank of America climbed 2.6%, JPMorgan rose 1.7% and Wells Fargo popped 2.4%.

Meanwhile, US data on Thursday came worse than expected, signalling a slowdown in the economy. Weekly initial jobless claims arrived at 770,000 for the week starting March 8, higher than the consensus of 700,000 and also higher than the previous number of 725,000 in the week prior.

Fed Chairman Jerome Powell late on Wednesday downplayed inflation worries and reiterated he wants to see inflation consistently above 2% alongside a continued and stable improvement in the labor market before the central bank could consider changing rates or winding down its bond purchases.

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