A rout in technology companies pulled the Nasdaq composite index down 3.5% Thursday, the biggest loss for the tech-heavy index since October.
The S&P 500 fell 2.5% and the Dow Jones industrial average lost 1.8%, a day after the blue chip index set a record high.
A steady march higher in Treasury yields has been drawing money out of the stock market and leading investors to question whether the massive run-up in Big Tech valuations in recent months has been excessive. Bond yields are rising as investors anticipate more stimulus from Washington, D.C., greater economic growth and possibly a pickup in inflation.
The Dow lost 559 points, or 1.8%, closing at 31,402. The Nasdaq lost 478 points, or 3.5%, falling to 13,119. The S&P 500 dropped 96 points, or 2.5%, closing at 3,829.
The yield on the 10-year U.S. Treasury note rose to 1.52%, a level not seen in more than a year and far above the 0.92% level it was trading at only two months ago. That indicated investors were moving money out of bonds, a sign of worries over higher inflation as well as confidence in economic growth. Every tick up in bond yields recently has corresponded with a tick down in stock prices.
“The yield on the 10-year note crossed the line in the sand at 1.50%, which from a technical perspective further confirms that higher rates are likely,” said Sam Stovall, chief investment strategist at CFRA.
The economy grew at an annual pace of 4.1% in the final three months of 2020, slightly faster than first estimated. The influx of new government stimulus efforts and accelerated vaccine distribution could lift growth in the current quarter, ending in March, to 5% or even higher, economists believe.
“The bond market is reacting to the positive economic growth,” said Brent Schutte, chief investment strategist, Northwestern Mutual Wealth Management Company. “It means there’s some hope on the horizon.”
Technology stocks, which tend to have higher valuations, have been one of the victims of the rise in bond yields. As bond yields climb, more investors shift money into those higher yielding assets, which tends to negatively impact stocks that are priced for growth and not for regular dividend payouts.
Apple, Amazon, Facebook and Microsoft—all companies that pushed the stock market higher last year—were down 2.4% or more.
The market will likely see broader growth as actual economic growth widens to include many of the sectors that have been beaten down during the pandemic, Schutte said.
The Russell 2000 index of smaller company stocks, which was down 2.5% in afternoon trading Thursday, has been far outpacing larger indexes, a signal that investors expect broader growth to continue. He noted improvements in retail sales, the housing market and consumer confidence.
“All those things are strong right now and the backdrop for further gains is still there,” Schutte said.
Global stock markets have soared over the past six months on optimism about coronavirus vaccines and central bank promises of abundant credit to support struggling economies. Those sentiments have faltered due to warnings the rally might be too early and that inflation might rise.
On Wednesday, Federal Reserve Chair Jerome Powell affirmed the Fed’s commitment to low interest rates in a second day of testimony to legislators in Washington.
The central bank earlier indicated it would allow the economy to run hot to make sure a recovery is well-established following its deepest slump since the 1930s. Powell said it might take more than three years to hit the Fed’s target of 2% inflation.
Investors also are looking for Congress to approve President Joe Biden’s proposed economic aid plan. That includes $1,400 checks to most Americans. However, the plan faces staunch opposition from Republicans and is still subject to negotiations. Democrats have chosen to use the legislative process known as reconciliation that would allow them to pass the bill without GOP support.