The technology-heavy Nasdaq Composite was down 1.6 per cent after being down 3.9 per cent earlier. The Dow Jones Industrial Average, which is much less exposed to tech stocks than the two other indexes, was down 0.3 per cent.
The companies that were dragging down the overall market were the big tech names that had pushed the market significantly higher the past year: Apple, Amazon, Microsoft and Tesla. Since the pandemic began, investors consistently pushed the prices of these companies’ stocks to stratospheric heights, betting that quarantined consumers would do most of their shopping online and spend money on devices and services for entertainment.
The bet mostly paid off, as big tech companies reported big profits last year. But the pandemic may be reaching its end stages, with millions of vaccines being administered each week in the US and across the globe now. It may cause consumers to return to their pre-pandemic habits.
Apple fell 2.9 per cent, Microsoft lost 0.9 per cent, Amazon dropped 0.8 per cent and Tesla fell 4.6 per cent. Part of the decline in Tesla was caused by the falling price of Bitcoin. The electric car maker put $US1.5 billion of its cash into the digital currency earlier this year, and there’s been a sharp pullback in Bitcoin’s price in the last couple days. Investors now use at least part of Tesla’s valuation as a proxy for Bitcoin’s movement.
A bigger part of the reason for the decline has been what’s going on in the bond market, and the dynamic that happens to stock valuations when bond yields rise. The yield on the 10-year Treasury note rose to 1.36 per cent, continuing its quick climb up over the last few weeks.
When bond yields rise, stock prices tend to be negatively impacted because investors turn an increasingly larger portion of their money toward the higher, steadier stream of income that bonds provide.
While eventually bond yields impact big dividend-paying stocks like consumer staples, utilities and real estate, it does tend to impact stocks that have big valuations like technology stocks much earlier. Tech stocks tend to have higher-than-average price-to-earnings ratios, which values a stock on how much the company earns in in profits each year versus its stock price. The S&P 500 index is currently trading at a price-to-earnings ratio of 32, historically high by any measurement, while the price-to-earnings ratio of a company like Amazon is north of 75.
More broadly, investors remain focused on the future of global economies badly hit by COVID-19 and the potential for more stimulus to fix them. The US House of Representatives is likely to vote on President Joe Biden’s proposed stimulus package by the end of the week. It would include $US1400 ($1770) cheques to most Americans, additional payments for children, and billions of dollars in aid to state and local governments as well as additional aid to businesses impacted by the pandemic.
The large amount of stimulus being pumped into the economy has given some investors pause, reviving worries about inflation that have been nearly nonexistent for more than a decade. The inflation worries have been a big driver of why bond yields have risen.
“Overall, the view is this rise in yields is just a reflection of confidence in economy and the vaccine rollout,” said Leslie Falconio, senior strategist at UBS Global Wealth Management.
“Right now, this rise in yields, given the fact that financial conditions are still loose, is not a red flag,” she said. “As long as growth supports the rise in interest rates, then that’s not a concern.”
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