Big decline in technology stocks pulls broader market lower
A massive decline in technology stocks was dragging the broader market lower in early trading Tuesday, as investors remain increasingly focused on a big tick up in bond yields and what it means for the overall market.
The S&P 500 index was down 1.3% as of 9:50 a.m. Eastern. The technology-heavy Nasdaq Composite was down significantly more, 3.5%. The Dow Jones Industrial Average, which is much less exposed to tech stocks than the two other indexes, was down a relatively modest 0.7%.
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 Motors. 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 invest in new devices to entertain themselves.
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 U.S. and across the globe now. It may cause consumers to return to their pre-pandemic habits.
Apple shares were down 3.5%, Microsoft shares fell 2%, Amazon was down 2% and Tesla fell 10%. Part of the decline in Tesla’s shares was caused by the prices of Bitcoin. The electronic motor company put $1.5 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.
But 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 U.S. Treasury Note rose to 1.37% in early trading, 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 now higher, steadier stream of income that bonds provide.
While that doesn’t typically 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. 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 U.S. House of Representatives is likely to vote on President Joe Biden’s proposed stimulus package by the end of the week. It would include $1,400 checks 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.
But 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.
Federal Reserve Chair Jay Powell speaks to Congress on Tuesday and Wednesday as part of his regularly schedule updated for lawmakers. Investors will be looking for any clues to see if Powell and the Fed are concerned about inflation and whether that will change the central bank’s low interest rate policies.
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