U.S. stock indexes opened lower today, and oil prices slipped as new Covid related shutdowns in China added to the uncertainty investors are facing. The Dow Jones fell 0.3%, the S&P 500 dropped 0.7%, and the Nasdaq fell 1.3%, a continuation of last week’s 3.9% loss.
The Federal Reserve (Fed) signaled that it would raise borrowing costs and reduce its balance sheet to fight inflation which caused technology stocks to take a plunge. This hawkish stance by the Fed has led to rising treasury yields. Currently, the 10-year yield stands at 2.78%, the highest since 2019.
Welt’s Holger Zschaepitz shared his thoughts on Twitter (NYSE: TWTR), showing a clear divergence in the chart trajectory between U.S. tech stocks and bond yields that is taking place in April.
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A difficult year for tech and growth stocks
Rising bond yields mean that tech and other growth stocks whose valuations are based on expected profit and cash flows far in the future will have a hard time in this environment. Higher yields on Treasuries will mean that future flows of these stocks are less valuable in the present.
Michael Darda, chief economist and market strategist at MKM Partners, shared his views on the market:
“Our valuation work shows that financials remain the most attractive cyclical sector while healthcare is the most attractive defensive sector. High valuation tech across the capitalization structure remains an ‘avoid’ or a short, in our view.”
Ahead of bank earnings and inflation data which is due later this week, investors are left to gauge the market’s overall health by tracking the Bond yields.
Founder and CEO of Endeavour Equities, Douglas Orr, opined:
“This is the worst Bond Mkt Crash since 1994 & 1987 with -14% returns from Peak in Mar-20. And Fed is only now getting Hawkish with QT B/S reduction starting in May. Real Bond Yields remain -ve.”
Tech stocks historically feel more pressure when Bond yields rise; nonetheless, it is difficult to predict how much pain tech stocks will experience in this new environment where inflation is seemingly running rampant.
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