Tech Stocks End Lower Amid Rising Bond Yields

02/22/2021 | 04:20pm

By Caitlin Ostroff and Alexander Osipovich

The Nasdaq Composite finished lower on Monday, as rising bond yields and investors' bets on an economic rebound later this year weighed on the shares of highflying technology stocks such as Apple and Microsoft.

The tech-heavy Nasdaq dropped 2.5%. The broad-based S&P 500 slipped 0.8%, while the Dow Jones Industrial Average gained less than 0.1%.

Tech giants whose shares were recently trading at records posted broad declines. Microsoft dropped 2.5%, while Apple slid 2.7% and Amazon.com shed 2%. Electric-car maker Tesla tumbled 8.2%.

Such stocks powered the U.S. stock market's rebound from the coronavirus selloff just under a year ago, and they also are a favorite of the small investors who have piled into stock and options trading over the past year. But the rally has prompted concerns that megacap tech stocks are overvalued, making them vulnerable to sudden slumps.

Among the factors behind their declines on Monday, investors said, are recent gains in U.S. government-bond yields. Treasurys have sold off in recent weeks as investors have grown increasingly confident about the prospects for an economic recovery, pushing up their yields, which move in the opposite direction from prices. That increases the attractiveness of government bonds -- often seen as a safe-haven investment -- while reducing the allure of tech stocks.

"As the yield goes up, there is more demand for [government bonds] in relation to other assets," said Hani Redha, a portfolio manager at PineBridge Investments. "How much are you willing to pay for stocks? If you're only getting a very low yield from bonds, you should be willing to pay a higher amount for stocks. But that starts to change when bond yields go up."

The yield on 10-year Treasurys rose to 1.370%, from 1.344% Friday, extending its gains after climbing for three consecutive weeks.

Bond yields have climbed because of the rollout of Covid-19 vaccines and President Biden's proposed $1.9 trillion stimulus package, which investors expect will accelerate the economic rebound.

"They are about to put lighter fluid onto the barbecue with this $1.9 trillion in stimulus," said Patrick Spencer, managing director of U.S. investment firm Baird. "You've got everything in your favor at the moment: good news on Covid-19 and stimulus and good earnings. That is why rates are higher."

Oil prices have recovered to pre-pandemic levels amid expectations that mass vaccinations will lead to a revival of travel. Front-month U.S. crude futures gained 3.8% on Monday to settle at $61.49 a barrel, their highest level since January 2020. Analysts attributed the gains to a weaker dollar, which makes oil cheaper overseas, and expectations that inventory data to be released later this week will show a sharp drop in U.S. stockpiles.

Meanwhile, money managers have rotated out of richly valued technology stocks into economically sensitive sectors, such as banking and energy, which could benefit from the anticipated recovery.

"Valuations for technology and growth stocks have generally been too high, compared to the rest of the market," said Jason Pride, chief investment officer for private wealth at Glenmede.

Since late last year, Glenmede has been pivoting into stocks of companies with smaller market capitalizations, Mr. Pride said. More recently it has looked into opportunities in corporate real estate, which suffered steep losses in the Covid-19 pandemic, he added.

In corporate news, Kohl's shares jumped 6.2% after The Wall Street Journal reported that a group of activist investors with a large stake in the company is attempting to take control of the department-store chain's board.

Cooper Tire & Rubber shares surged 29% after Goodyear Tire & Rubber said Monday it agreed to buy its rival for about $2.8 billion in cash and stock. Goodyear shares gained 21% on the news.

Investors are watching for any indication of how the Federal Reserve might react to the sharp rise in bond yields. Fed Chair Jerome Powell is set to testify before the Senate Banking Committee on Tuesday.

"How they will respond to this, that is also part of the anxiety," Mr. Redha said. "It is a pretty sensitive time, and the market is going to be fixated on this."

Overseas, the pan-continental Stoxx Europe 600 fell 0.4%. In Asia, most major stock benchmarks retreated. The Shanghai Composite Index fell almost 1.5%, while Hong Kong's Hang Seng dropped 1.1%.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Alexander Osipovich at alexander.osipovich@dowjones.com

(END) Dow Jones Newswires

02-22-21 1620ET

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