Markets Now Down
Stocks have started the day in the red after being higher in pre-market trading after the 10-year Treasury yield jumped above 1.4%.
The S&P 500 had fallen 0.3%, while the Dow Jones Industrial Average had fallen 80.33 points, or 0.3%. The Nasdaq Composite has dropped 0.8%.
Blame the jump in the 10-year Treasury yield. Trading in the 10-year Treasury had been relatively calm, with the yield was sitting at around 1.34% just before 9 a.m. News that Johnson & Johnson’s vaccine was recommended for an EUA, however, caused the 10-year yield to jump to 1.41—and the market suddenly turned negative.
The selling was lead by tech stocks. Apple (AAPL) has fallen 1.8%, while Microsoft (MSFT) has declined 1.1% and Zoom Video Communications (ZM) down 1.9%. Companies with high long-term growth prospects are especially sensitive to interest rates, which erode the value of future cash flows and growth companies expect to see a large share of their profits farther into the future than more mature business.
Treasury yields have been on a tear recently and growth stocks have taken the brunt of the reaction. Since February 10, when Treasury yields began their most recent race upwards, the Russell 2000 Growth Index, an index of smaller, less profitable names, is down more than 5%, while the large-cap Vanguard S&P 500 Growth Index Fund ETF (VOOG) is down 3% since that date.
Importantly, stocks still look relatively attractive versus bonds; the real Treasury yield—or the yield minus expected inflation—is still negative, at minus 0.75%. That means the 10-year Treasury bond loses value against inflation, which makes owning riskier assets like stocks more appealing. But investors are worried that safe bonds are becoming more attractive than they had been, as the real yield has moved closer to positive, according to research from Evercore. “We are not shocked by the move in 10yr yields,” writes Dennis DeBusschere, head of portfolio strategy research at Evercore ISI. “We should not assume investors will be willing to accept -100 basis points in real returns forever if the economy normalizes.”
For now, if you want to know where the market is headed, watch interest rates.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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February 24, 2021 at 10:02PM
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