The Treasury Yields Is Spooking Tech Stocks Again

Stocks and bonds sold off after Federal Reserve Chairman Jerome Powell underwhelmed markets by refraining from pushing back more forcefully against the recent spike in Treasury yields.

The Nasdaq 100 extended losses from a February peak to almost 10%. The rout in technology shares sent the Nasdaq 100 Index toward a correction. 

Tesla(TSLA) were hit hard and the stock fell 4.86% by the time the market closed.

Apple (AAPL-US) fell 1.58%; Facebook (FB-US) rose 0.87%; Alphabet (GOOGL-US) rose 1.12%; Amazon (AMZN-US) fell 0.91%; Microsoft (MSFT-US) fell 0.36% .

On Thursday, U.S. Federal Reserve Chair Jerome Powell said the economic reopening could “create some upward pressure on prices.” He said he expects the central bank to be “patient” in terms of acting on policy, even if the economy sees “transitory increases in inflation.”

Powell noted, however, that the recent rise in yields did catch his attention, as have improving economic conditions.

Bond yields rose again following Powell’s comments. The benchmark 10-year U.S. Treasury yield last stood at 1.5762%.

Photo: CNBC

The gauge is suffering as investors ditch companies that thrived in the work-from-home era in favor of last year’s laggards, betting that vaccinations will end Covid lockdowns and fuel economic growth that aids cyclical stocks. The latest bout of selling came after a spike in yields raised concern that companies trading at high valuations may have trouble living up to expectations if borrowing costs surge.

“We’ve seen the overvalued megacap tech space assume the brunt of the weakness here,” said Candice Bangsund, portfolio manager of global asset allocation at Fiera Capital. “These sectors are having more trouble digesting the environment of higher bond yields.”

While the Nasdaq 100 avoided a correction -- typically defined as a 10% drop from a peak -- the gauge is suffering as investors scale back bets on the market’s speculative fringes. The mania in special purpose acquisition companies is showing signs of hitting a saturation point, with an index tracking them down about 20% from its peak. 

The pullback isn’t a surprise given the outlook for a more normal economy to return, and could represent a buying opportunity in a bull market that still has legs, according to Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

“It may take some time for this to play out, but I don’t believe the bull market will be derailed by this and ultimately any pullbacks are normal and can be bought,” he said.

Nonetheless, the rotation away from tech stocks seems to have taken hold and market leadership is likely to change, according to Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management Co.

“It’s kind of been the reverse of what we saw over the summer,” he said. “Some of the biggest tech companies are certainly under pressure and a lot of that has to do with the backup of long-term interest rates and what that means for longer duration equities.”

Fixed-income investors, worried about inflation that could come with the U.S. economic recovery, are selling bonds and the activity is bleeding into the stock market. Institutional investors taking their cue from the bond market are swapping tech and growth stocks in their holdings for cyclical and value names, and retail investors can’t afford to ignore it, CNBC’s Jim Cramer said.

Cramer suggested a one-day decline of as much as 7% in stocks could fast-track the market to the acceptance stage of grief, “where there’s a collective sense that the market’s toast.”

In the meantime, he said investors should have cash on the sideline and wait for the right moment to find the market bottom in the multi-week decline.

“We’re going to get bounces, bounces that make people feel like their bargaining has succeeded, but it hasn’t,” Cramer said. “If you lighten up … you’re going to be ready for the moment of capitulation, the crescendo, the acceptance that marks the trough.”