Wall Street’s main indexes recoiled from record highs on Thursday as surging U.S. Treasury yields took the shine off stocks now that a strong economic recovery looked more certain and investors clung to bets that inflation would rise.
The S&P 500 was down 2.03%, and retreating technology stocks dragged the Nasdaq down more than 3% at one point as the benchmark 10-year note yield surged more than 20 basis points above 1.6% to a one-year high.
That surge put the note yield above the 1.48% S&P 500 dividend yield, wiping out the strong advantage that the stock market has held over bonds during the pandemic.
PETER TUZ, PRESIDENT, CHASE INVESTMENT COUNSEL, CHARLOTTESVILLE, VIRGINIA
“It’s an exciting day on the market. Rates matter. We’ve seen the 10-year Treasury yield go from below 1% to 1.5% pretty quickly. At 1.5%, the yield is comparable to S&P 500 dividend yield. And there’s no capital risk with a 10-year, you’ll get your principle back. And all of a sudden it’s competitive with stocks.
“On top of that you’ve had an equity market that’s hit record highs many times this year and it’s expensive relative to historic norms. We were primed for a sell-off and we’re getting one.
“I ignore (the meme stocks), but what they do is point to how speculative in some ways the market is. When you have this small group of stocks acting irrational it puts it in people’s minds that these things can fluctuate up and down and they don’t want any part of it. The meme stocks volatility scares people out of the market in general.
“We’ve had a great market and we have these sell-offs driven by interest rates. You see a lot of corrections in individual stocks because of guidance. Returning to normal is painful for shareholders.”
MICHAEL ANTONELLI, MARKET STRATEGIST, BAIRD, MILWAUKEE
“We had a Treasury auction and the auction result was really sloppy. Rates are having big moves today. The 10-year, the five year yields have been rising throughout the day. The market is really focused on the interest rate world right now, what they’re saying and how fast they’re moving.”
“The auction had a big tail to it … there was not a lot of demand.” he said so as a result “The 10-year yield and the 5-year started spiking around 1 PM EST. People were selling bonds.”
“When yields rise rapidly that scares the stock market.”
“In a low interest rate world a lot of big names and popular stocks do well. When rates rise those kinds of stocks go out of favor.”
“Rising rates is kicking off a rotation from all those hot popular tech names into cyclicals and banks and energy.”
MICHAEL PURVES, CHIEF EXECUTIVE, TALLBACKEN CAPITAL ADVISORS, NEW YORK
“The rate market is getting very dynamic. There have been a lot of rate rises since last August, but this has been the first one that has created a disorderly Treasury sell-off. Given how important Treasuries are to everything, that creates all sort of ripples.”
“The bond market is starting to look like a different landscape. There will be more interest rate hikes in 2023, which is pretty far away but not that far away. When you’ve had zero rates forever, and then those are not quite forever, that’s very disruptive to how markets are wired. But I don’t think it’s a fire alarm.”
“A lot of equities have gone up too much, too fast. Ultimately, there’s rate sensitivity.”
ARNIM HOLZER, MACRO AND DEFENSE CORRELATION STRATEGIST, EAB INVESTMENT GROUP, PHILADELPHIA
“There is a concern that despite the Fed saying they are not going to do anything about interest rates, the level of inflation might get away from the Fed, and that will have a market impact… The Fed’s policy should be a calming message, but because of the amount of supply – Treasury debt – the market is beginning to interpret that as much more stimulus, without potential of a check or discipline. The fear is that excesses could develop in the meantime that twist risk-taking in the market to a place that is overly frothy. The market is trying to get ahead of that by getting conservative.”
“The (yield) curve is telling you that growth is coming back with a vengeance, and if the Fed is not going to do anything about it, then you can speculate with impunity. The institutional crowd has concerns that at some point if we mean-revert, it’s going to be the big-cap names that are a source of liquidity. They’re going to prepare for that.”