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S&P 500, Dow Diverge as Tech Stocks Rebound

02/26/2021 | 01:05pm

By Caitlin Ostroff and Paul Vigna

U.S. stocks were mixed Friday as equities investors tried to digest the rapid rise in bond yields.

The Dow Jones Industrial Average fell 0.6%, while the S&P 500 gained 0.5%, and the Nasdaq Composite added 1.5%. Overseas markets were down as well, one day after a sharp selloff in U.S. technology stocks.

Yields on U.S. Treasurys, considered among the safest assets to own, have been rising in recent days as money managers bet on a rapid economic rebound. The yield on the 10-year Treasury ticked down to 1.48% on Friday, from 1.513% on Thursday, its highest closing level in a year.

The pace of the recent rise in bond yields, which climb when prices fall, has tempered investors' appetite for technology stocks. Expectations among some that inflation will climb sharply are also prompting concern that the Federal Reserve may increase interest rates sooner than previously anticipated, which could potentially boost borrowing costs and weigh on economic growth.

"What has happened in recent weeks is the markets have had to reprice expectations of the Federal Reserve's rate hikes," said Dwyfor Evans, head of macro strategy for the Asia-Pacific region at State Street Global Markets in Hong Kong.

He said the pickup in bond yields would have a knock-on effect on areas such as corporate lending and mortgage rates. "That is why equities will come under pressure here, because rising yields will have some impact on the real [economy] and earnings might have to slow," Mr. Evans said.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said the Fed is left with only a few options. The central bank can either fight the bond market by ramping up its bond buying, abandon its dovish policies, or do nothing and hope it goes away, he said. All options would have different ramifications for the markets and economy, and that is making life difficult for investors.

The rollout of Covid-19 vaccines, a fresh fiscal stimulus package promised by President Biden, and the Federal Reserve's pledge to keep its easy-money policies in place have buoyed sentiment for many weeks.

But the sharp turnaround in the bond market has fueled concerns that soaring equities valuations driven by the technology sector's rally are now too high.

"Everything is divorced from the risk in those instruments. Everything is mispriced," said James Athey, senior investment manager at Aberdeen Standard Investments. "The problem is that not every investor is a fundamental investor. Markets are increasingly dominated by momentum, are driven by price action. The more the price falls, the more they sell."

Fresh federal data released Friday showed that U.S. consumer spending increased 2.4% in January after household incomes got a boost from the latest round of stimulus checks. Investors expect Congress to pass another fiscal aid package in the coming weeks.

In the longer term, some investors say that the vaccines and government spending will bolster corporate earnings, and boost appetite for stocks.

"The fundamental picture is robust. It may even be more robust compared with before" the vaccine rollout, said Wei Li, head of investment strategy for BlackRock's exchange-traded fund and index investments for Europe, Middle East and Africa. "Once the yield levels stabilize, risk assets could still do well."

Among corporate names, Salesforce was down 4.8% after the company delivered earnings guidance that was below expectations, despite a strong fourth-quarter report.

Tech leaders Apple, Amazon Tesla and Facebook were all higher Friday morning, though they remain down for the week. Tesla is down more than 12% this week.

The ICE U.S. Dollar Index, which tracks the greenback against a basket of currencies, rose 0.5%. Investors view the dollar as a safe asset, and increase demand for it when the stock market declines.

Overseas, the Stoxx Europe 600 index fell 1.1%.

In Asia, most major stock benchmarks ended the day sharply lower. Japan's Nikkei 225 index dropped 4%, its biggest one-day decline since April. China's CSI 300 Index, South Korea's Kospi Composite, and Australia's S&P / ASX 200 each fell more than 2%. The Hang Seng Index retreated more than 3%.

"Given the market has already rallied over the past 10 months, you are seeing quite a bit of profit-taking," said Ken Wong, a portfolio manager at Eastspring Investments. Mr. Wong said rising borrowing costs were causing some investors to unwind positions bought using debt, while expensive valuations were also fueling caution.

Some Asia-Pacific bond markets followed Thursday's U.S. selloff: Australian benchmark yields rose to 1.87%, the highest since 2019.

In Japan, 10-year yields have also hit multiyear highs this week, albeit from a low base. They stood at 0.15% by late afternoon Friday in Tokyo. Since 2016, the Bank of Japan has kept 10-year rates at around zero under its yield-curve control policy, though in recent years it has permitted rates to overshoot or undershoot by as much as 0.2 percentage points.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Paul Vigna at paul.vigna@wsj.com

(END) Dow Jones Newswires

02-26-21 1304ET

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