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S&P 500 temporarily erases its 2021 gains as bond yields jump

A Wall Street sign carved into the side of a building
Federal Reserve Chairman Jerome H. Powell made remarks Thursday that signaled a wait-and-see stance on the surge in bond yields, not easing investors’ concerns about inflation.
(Mark Lennihan / Associated Press)

Technology companies led another broad sell-off on Wall Street on Thursday as a leap in bond yields put more pressure on the market’s highflying stocks.

The Standard & Poor’s 500 index ended the day down 1.3%, its third straight loss. The benchmark index, which briefly dipped into the red for the year, is on track for its third consecutive weekly loss. Just four days ago it notched its biggest gain since June. That market rally was driven by what now appears to be a brief pause in the recent, swift rise in bond yields, which in turn pushes up interest rates on loans for consumers and businesses.

The latest losses came as the yield on the 10-year Treasury rose sharply during a question-and-answer session with Federal Reserve Chairman Jerome H. Powell during which Powell said inflation will probably pick up in the coming months. He cautioned that the increase will be temporary and won’t be enough for the Fed to alter its low-interest rate-policies.

The remarks, signaling a wait-and-see stance on the surge in bond yields, failed to ease investors’ concerns that stronger growth will lead to higher inflation, which unchecked can slow economic growth.

“Rates have moved quite rapidly the last few days, so the market is generally on edge and looking for more reassurance in the short term,” said Lisa Erickson, head of traditional investments at U.S. Bank Wealth Management.

The S&P 500 fell 51.25 points to 3,768.47. The Dow Jones industrial average fell 345.95 points, or 1.1%, to 30,924.14. The tech-heavy Nasdaq composite dropped 274.28 points, or 2.1%, to 12,723.47 — into the red for the year.

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The Russell 2000 index of smaller-company stocks slid 60.87 points, or 2.8%, to 2,146.92.

The economy is expected to reopen this spring and summer as vaccines are distributed and the coronavirus retreats. Many economists predict a resulting spending boom that will stretch available supplies of goods and services. That’s likely to push up prices, Powell said Thursday.

Even so, Powell gave no hint that the Fed would take steps to keep longer-term interest rates in check, such as by shifting some of its $80 billion in monthly Treasury purchases to longer-term securities.

“We think our current policy stance is appropriate,” he said.

The yield on the 10-year Treasury note jumped to 1.54% during Powell’s remarks from 1.47% just before, a significant move. At the beginning of the year it was 0.93%.

Investors have been keeping a close eye in recent weeks on the bond market, where yields have been rising along with expectations that the economy — and possibly inflation — could be set to pick up as vaccinations increase and pandemic restrictions on businesses, travel and schooling lift more.

When yields rise quickly, that causes Wall Street to rethink the value of stocks. Technology stocks are most vulnerable to this reassessment after having soared during the pandemic, making them look pricier than the rest of the market. Bank stocks, in contrast, tend to do better when bond yields are rising because higher yields mean banks can charge higher rates on mortgages and other loans.

“You’re having a fairly healthy and natural consolidation period,” said Mark Hackett, chief of investment research at Nationwide.

Since late last year, Wall Street has been anticipating an improving economy from the eventual distribution of vaccines, additional stimulus and a steadier reopening, he said.

“The market tends to do better when the good news is further out and struggle more when it is in hand,” he said. “There’s really nothing currently as the next catalyst.”

The price of U.S. crude oil jumped 4.2% after OPEC members agreed to leave most of their oil production cuts in place. That helped send energy company stocks broadly higher. Exxon Mobil rose 3.9%. ConocoPhillips rose 3.7%.

The Senate is moving forward with President Biden’s stimulus bill, with most of the negotiations now happening between the more moderate Democrats in the Senate and the White House.

Investors were also looking ahead to the February jobs report due out Friday. Economists surveyed by FactSet estimate that employers added 225,000 jobs last month. The report also includes numbers for how much wages are rising across the economy, a key component of inflation.


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