The Dow Jones Industrial Average and S&P 500 saw their stocks pull back during Tuesday’s trading. Both indices lost momentum when a tech rally in the morning fell flat later in the day The DJIA fell 127.51 points, or 0.4%, to 32825.95, recording its first loss in seven sessions. In addition, the S&P 500 fell back 6.23 points, or 0.2%, to 3962.71. Both indices lost gains they posted during their record run Monday. Meanwhile, tech-heavy Nasdaq barely emerged alive, managing a gain of 11.86 points, or less than 0.1%, to close at 13471.57. Earlier Tuesday, Nasdaq enjoyed a 1.2% lift before going down.
Stocks Pull Back As Bond Yields Went Up
Despite its mini-gain yesterday, the Nasdaq already lost more than 4% from its closing high set last month. Government bond yields jumped yesterday as tech stocks rallied. This increased the appeal of bonds to investors, who will then abandon positions in stocks in favor of the better deal. Conversely, tech and other growth companies lose some of their lusters. Yesterday, the yield on 10-year Treasury notes rose to 1.622%, from 1.609% the day before. Usually, yields rise when bond prices fall. Eoin Murray, head of investment at Federated Hermès, sees the bond spike to last at least until summer. “Bond volatility is going to stay elevated probably at least through the summer, if not beyond that. The bond market is considerably more nervous about inflationary prospects than the equity market appears to be.”
However, tech still managed to lead the gainers despite the afternoon fizz. Apple, Microsoft, and Google parent Alphabet all went up more than 1%. Facebook bucked the trend and gained more than 2% to close at $279.28. According to Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions, he has yet to give up on technology stocks. “Tech has faced headwinds for the past couple of months,” “But I find it hard to give up on tech. In the longer term, when you look at what’s really driving the U.S. economy, it’s tech,” he said.
Federal Reserve Policy Meeting
Meanwhile, investors are keeping a close watch on the ongoing Federal Reserve policy meeting. With the recent rise in bond yield, all eyes are on Federal Reserve chairman Jerome Powell. Investors await Powell’s public remarks at the conclusion of their two-day meeting.
In particular, everyone would want to know if the Fed will revise its interest rate outlook. Or, if the central bank decides to go easy on its bond-buying program. This Tuesday, auctions for $35 billion of 42-day bonds and $24 billion of 19-year 11-month bonds will go underway. In the meantime, the Fed will release new economic and interest rate forecasts. This could indicate whether or not Fed officials plan to raise rates by 2023.
Incoming Stimulus Relief
Previous liberal monetary policy, low-interest rates, and a deluge of stimulus money helped push the S&P 500 to record heights. However, once the Feds say they worry about inflation, this could deflate the stock rally. Already, rising bond rates already send worrying signals to investors that interest rates might go up.
“Everything is feeding off the fact there is this huge recovery taking place,” said Fahad Kamal, chief investment officer at Kleinwort Hambros. “That should obviously help some of the sectors that have been beaten down for a long time and are obviously a lot cheaper. We are going to see a rise of the forgotten,” he added.
Great Outlook For S&P 500 the Next Few Weeks
As stocks pull back, Bank of America still envisions record highs for the S&P 500 within the next few weeks. BofA expects the index to hit a 4,270 price target derived from a bullish cup and handle pattern. “Seasonality shines in April, which is the strongest month of the November-April period and is up 66% of the time with an average return of 1.37%,” the bank said. Notably, the BofA’s seasonality analysis uses historical data that goes back to 1928.
Watch the CNBC News video that addresses why rising bond yields challenge stocks and the Fed:
Do you think the Federal Reserve will take action to head off concerns of bond yields rising? Or, should they just stay put and let economic recovery continue before doing anything? Let us know what you think about rising bond yields. Share your comments below.