Back in January we cautioned that while growth stocks were the biggest winners in 2020, they were ripe for a pullback in 2021. Because of weak economic growth, investors turned to growth stocks, looking for outsized gains. Tech stocks have soared since March 2020, but so too have their valuations. With bond yields going higher, investors are now turning to value stocks, with sky-high tech stocks selling off.
Why Are Tech Stocks Falling?
Over the last few trading days, going back to February 16, the tech-heavy Nasdaq has lost six percent of its value and is headed to its longest losing streak since 2019. The S&P 500 meanwhile extended its longest losing steak since the stock market crash in February 2020.
Compared to value stocks, so-called growth stocks are having their worst month in more than two decades. Hard-hit cyclical stocks though, including commodities, consumer staples, banks, and utilities, are trending higher.
Why? Optimism around the vaccine rollouts, faster economic growth, and rising inflation have sent bond yields close to a one-year high.
The gap between five- and 30-year bond yields are at their highest level in more than six years. And yields on the 10-year Treasury, which are a bellwether of investor sentiment, continue to edge higher.
Higher bond yields, which move inversely to price, are dragging tech stocks lower. That’s because higher bond yields tend to weigh on stocks since they offer a safe, attractive alternative. And with tech valuations at nosebleed levels, investors are taking profits and seeking shelter.
Stocks are still near record levels, but it appears as though the broader equity benchmarks (S&P 500 and Dow Jones Industrial Average) have already priced in much of the global recovery spurred by U.S. stimulus and vaccines. And for stocks to climb higher, there needs to be a reason.
And investors may have just gotten one.
In the midst of the sell-off, Jerome Powell, Chair of the Federal Reserve, hinted that rising bond yields are becoming a concern. Powell said that U.S. “economic recovery remains uneven and far from complete, and the path ahead is highly uncertain.” Moreover, the Federal Reserve has no plans on cutting back on its support for the U.S. economy.
Analysts may be bullish on the outlook of the U.S. economy, but unemployment remains elevated at 6.3% and the U.S. economy still needs to create 10 million jobs just to get to its pre-pandemic level.
“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” Powell added.
Jerome Powell may have put a stopper in the sell-off, time will tell, but investors will still need to contend with the same issues later in 2021.
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