Dow falls 300 points as investors unwind rotation trade

What’s driving the market?

Stocks extended losses in the final hour of trading, but analysts said there was no clear catalyst for the move.

Instead, the selling appeared to largely be a “mean reversion” in a market left vulnerable by the substantial outperformance of cyclically sensitive stocks over technology shares and other growth stocks that had been the highest fliers during the stay-at-home phase of the pandemic.

The move was “less of a catalyst-driven” reaction “than necessarily an unwind of a trade that had gotten extended,” said Arthur Hogan, chief market strategist for National, in a phone interview.

The cyclically oriented industrials sector led the way lower with a 1.8% fall, while the energy sector tumbled 1.4% as oil futures fell into correction territory. The small-cap Russell 2000 RUT, -3.58%, which has also benefited from the rotation, suffered Tuesday, falling 3.5%. The technology sector outperformed, but fell 0.6%, while the growth-oriented communications services sector declined 0.3%.

The rotation unwind theme was also in keeping with a slide in Treasury yields. A sharp backup in yields had previously put pressure on tech-related stocks, while boosting appetite for cyclicals as well as financial stocks, which benefit from an increased spread between long- and short-dated borrowing costs. Financial stocks also pulled back Tuesday as yields fell.

Analysts said investors were little moved by the first of two days of testimony by Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen.

Powell reiterated the Fed’s commitment to easy monetary policy, and said he didn’t think any surge in inflation this year will be large or persistent. He argued that the Fed has the tools to deal with higher inflation.

Live blog: Powell, Yellen face House panel amid concerns over deficit, inflation

In prepared remarks released on Monday, Powell said that the U.S. economy has recovered more quickly than generally expected “and looks to be strengthening,” but cautioned that the comeback is far from complete.

Powell has tried to communicate a stance that underscores the central bank’s desire to keep benchmark interest rates low while the labor market recovers from the impact of lockdown measures implemented to combat the coronavirus pandemic but some critics fear that policy makers may lose control of that narrative.

However, market bulls expect the combination of easy monetary policy, aggressive fiscal spending and pent-up demand to keep stocks pointing north. And despite Tuesday’s setback, the reflation theme is likely to keep cyclical stocks in favor over the long run, they said.

“The bottom line is the economy is set for an enormous spending boom and cyclical equities should still be favored with spending on the ‘old economy’ matching ‘the new economy’,” wrote Sean Darby, global head of strategy at Jefferies, in a note. “Dividends and buybacks are also set to accelerate.”

Tuesday also marks the anniversary of the pandemic lows on March 23, 2020, when all of the major U.S. stock benchmarks put in their bear-market lows, as the coronavirus pandemic plunged the U.S. into recession, before staging a powerful rebound, aided at least partly by a cocktail of fiscal spending and monetary-policy intervention.

Thus far, the rollout of vaccines has helped to mitigate some of the effects of the pandemic but economic recovery has come in fits and starts, with Europe showing signs of another burst of infections. Indeed, rising COVID-19 cases in Europe have fueled recent lockdown extensions in Germany, France and Italy. And the U.S. is administering about 2.5 million Covid vaccine shots every day, but the number of new cases is increasing in 21 states as governors relax restrictions on businesses.

On the vaccine front, federal official said early Tuesday that the results of a U.S. trial of AstraZeneca’s COVID-19 vaccine may have included “outdated information,” providing an “incomplete view of the efficacy data.

Meanwhile, expectations the Biden administration will press for another round of heavy spending centered on infrastructure were seen underpinning equities, though investors were also weighing the prospect of partially offsetting tax hikes.

New home sales occurred at a seasonally-adjusted annual rate of 775,000 in February, according to the U.S. Census Bureau. That was 18.2% down from the upwardly-revised pace of 948,000 in January and well below the consensus forecast of 879,000.

Which stocks are in focus?

• Shares of ViacomCBS Inc. VIAC, -9.06% VIACA, -9.05%, one of the top performers of the pandemic, fell 9.1% after the media company said it started an offering of $3 billion worth of equity securities. Shares are up nearly 150% over the past 12 months.
• GameStop GME, -6.55% shares fell 6.6% ahead of earnings that were due after Tuesday’s closing bell.
• Microsoft Corp. MSFT, +0.67% is in discussions to purchase videogame-focused chat platform Discord for more than $10 billion, according to a report by Bloomberg News. Microsoft shares rose 0.7%.

How are other markets trading?

• The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, 1.626% fell 4.5 basis points to 1.637%. Yields and bond prices move in opposite directions.
• The ICE U.S. Dollar Index DXY, +0.65%, a measure of the currency against a basket of six major rivals, was up 0.7%.
• Oil futures fell sharply as rising COVID-19 cases prompted extended lockdowns in Europe, with the U.S. benchmark CL.1, -6.76% tumbling more than 6% to close at $57.76 a barrel on the New York Mercantile Exchange.
• Gold futures edged lower, with the April contract GCJ21, -0.70% finishing with a loss of 0.8% at $1,725.10 an ounce.
• In Europe, the Stoxx 600 index SXXP, -0.20% fell 0.2%, while London’s FTSE 100 UKX, -0.40% declined 0.4%.
• In Asia, the Shanghai Composite SHCOMP, -0.93% fell 0.9%, Hong Kong’s Hang Seng Index HSI, -1.34% tumbled 1.3% and Japan’s Nikkei 225 NIK, -0.61% dropped 0.6%.