Thursday, October 28, 2021

Spike in bond yields scares investors, deflates tech stocks

Technology companies led a broader fall in stocks on Wall Street on Tuesday, deepening the market’s woes in September.

The S&P 500 fell 2%, its worst decline since May. The tech-heavy Nasdaq dropped 2.8%, its biggest drop since March. Disclaimers outweighed advances on the New York Stock Exchange 4 to 1.

The benchmark S&P 500 is down 3.8% so far this month and is on pace for its first monthly loss since January. The September slump has been the exception to a mostly steady stream of gains so far this year, which has brought the S&P 500 up 15.9% since early 2021.

The sell-off due to a sharp rise in Treasury yields forced investors to re-assess whether prices were too high for stocks, especially the most popular ones. The yield on the 10-year Treasury note, a benchmark for many types of loans, including mortgages, rose to 1.54%. This is its highest level since the end of June and was up 1.32% a week ago.

Bond yields began rising last week after the Federal Reserve sent clear signals that the central bank was moving closer to withdrawing the unprecedented support it has provided for the economy throughout the pandemic. The Fed indicated that it may begin raising its benchmark interest rate sometime next year and will likely begin reducing the pace of its monthly bond purchases before the end of this year.

“It’s all taking one of the weights that were lowering the yield and removing it,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “It clearly has a big impact on large cap, high growth, high multiple stocks.”

The increase in yields means Treasuries are paying more in interest, and that gives investors less incentive to pay higher prices for stocks and other things that are riskier bets than super-secure U.S. government bonds. Huh. The recent jump in rates has hit tech stocks especially hard because their prices look more expensive than the rest of the market, regardless of how much profit they are making.

Several tech stocks also recently bid on hopes of big profit growth in the future. When interest rates are low, an investor doesn’t lose much by paying higher prices for the stock and waiting years for growth to occur. But when Treasuries are paying more in the meantime, investors are less inclined.

The S&P 500 fell 90.48 points to end at 4,352.63. The Dow Jones Industrial Average fell 569.38 points, or 1.6%, to 34,299.99. The blue-chip index briefly fell 614 points.

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Shares of smaller companies also declined. The Russell 2000 Index fell 51.23 points, or 2.2%, to 2,229.78.

This week’s turmoil for the market is reminiscent of an episode earlier this year when rising inflation and expectations of a stronger economy caused Treasury yields to rise sharply. The 10-year yield rose to about 1.75% in March after starting the year around 0.90%. Tech stocks also bore the brunt of that downturn.

Chipmakers Nvidia fell 4.4%, Apple 2.4% and Microsoft 3.6%. The wider technology sector is also grappling with a global chip and parts shortage caused by the virus pandemic and could shut factories in parts of China due to power outages.

Communications companies also weighed down the market. Facebook and Google’s parent company, Alphabet, each declined 3.7%.

Energy was the only sector in the S&P 500 that was not in the red. Exxon Mobil was up 1% and Schlumberger gained 2.4% for the biggest gainers in S&P 500 stocks.

Another lingering market concern echoing from China is the potential collapse of one of China’s biggest real estate developers. Evergrande Group is struggling to avoid defaulting on billions of dollars in debt.

Markets in Asia were mixed while those in Europe fell.

Investors are dealing with a choppy market in September as they try to predict how the economic recovery will progress and how it will affect a variety of industries.

COVID-19 remains a threat and is still affecting businesses and consumers. Economic data on consumer spending and the job market have been mixed. US consumer confidence declined for the third straight month in September, according to a report from the Conference Board.

Companies are warning that supply chain problems and high prices could curtail sales and profits. The Federal Reserve has said rising inflation is temporary and linked to those supply chain problems as the economy recovers from the pandemic. Investors are still concerned that higher inflation could be more sustainable and rising bond yields reflect some of those concerns.

“The bottom line is that the supply chain thesis is really being tested and the Fed, businesses and consumers have had to respond to some ground realities,” said Eric Friedman, chief investment officer at US Bank Wealth Management. .

By Damien J Trois and Alex Veiga

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This News Originally From – The Epoch Times

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