The technology-heavy Nasdaq is under pressure from U.S. inflation concerns.
(John Smith/Corbis via Getty Images)
A good old-fashioned rotation in global stock markets over the past week turned into a broad selloff on Tuesday, with inflation fears back in front of mind. Technology shares had been declining in favor of more economically sensitive and cyclical sectors, but Tuesday’s losses were indiscriminate.
The Dow Jones Industrial Average was down 594 points, or 1.7%, on Tuesday morning—on track for its biggest one-day loss since late February. The S&P 500 fell 1.5%, and the Nasdaq Composite slumped 1.3%.
The threat of higher inflation has become a hot topic again. Rising commodity prices, labor constraints, supply chain disruptions, and more fiscal stimulus potentially in the pipeline are a cocktail for faster price growth in the economy. And that’s all with an ultra-dovish Federal Reserve that has made it explicit it will tolerate higher inflation in the future to make up for past shortfalls to its 2% annual target.
The prospect of higher rates just adds more fuel to the growth-to-value rotation underway in recent sessions. Growth stocks are expected to earn the bulk of their cash flows years down the road—when discounted back to the present at a higher rate, that reduces a stock’s present value. An expensive market relative to its history is particularly sensitive to declines due to rising interest rates.
S&P 500 technology shares extended their recent losses, down 1.4%, but all 11 sectors were in the red on Tuesday morning. Investors lately have focused more on companies that can thrive in the post-pandemic economy, rather than the software, cloud-computing, and e-commerce stay-at-home winners.
It’s a trade that has played out in fits and starts since a series of promising vaccine announcements last November. But add a bit of renewed inflation worry to the mix and the selloff broadened on Tuesday and cyclical sectors dropped as well. Energy shares lost 3.3%, industrials declined 2.3%, and financials fell 2%.
The traditional yield-generating sectors were also among the biggest losers on Tuesday, as utilities and real estate both declined by about 1.5%. Faster inflation means sooner interest rate increases by the Fed despite their current plans, the thinking goes, which makes dividend-paying stocks less attractive by comparison.
Accordingly with the mood in markets on Tuesday, bond yields rose. The yield on the 10-year U.S. Treasury note was up about 0.02 percentage point, to 1.62%, on Tuesday morning.
“Some days investors appear relaxed about inflation risks and the possibility of central banks having to lift rates and withdraw stimulus. Today is not one of those days,” said Russ Mould, an analyst at AJ Bell.
“The valuations of the tech-based growth companies in the U.S. are harder to justify in an inflationary and rising interest rate environment—where lower risk assets typically offer higher returns—hence the big fall in the Nasdaq yesterday,” Mould added.
European and Asian technology stocks also felt the pressure from rising U.S. inflation concerns on Tuesday. Tokyo’s Nikkei 225 fell 3.1%, while Hong Kong’s Hang Seng dropped 2%. The FTSE 100 in London lost 2.9%, the CAC 40 in Paris declined 2.3%, and the DAX in Frankfurt fell 2.4%.
A pair of inflation readings will get plenty of attention later this week. On Wednesday, the Bureau of Labor Statistics reports the consumer price index, which is seen gaining 0.4% in April after rising 0.3% in the prior month. On Thursday, the BLS reports the producer price index for April. The consensus estimate is for a 0.3% month-over-month increase, after a 1% jump in March.
Palantir Technologies (ticker: PLTR) stock jumped 4.5% after reporting a profit of 4 cents a share, in line with forecasts, on sales of $341 million, above expectations for $332 million.
Tesla (TSLA) stock lost 3% after data from a Chinese auto industry association showed that it sold roughly 26,000 electric vehicles in April in China, down from about 35,000 in March. That dragged down shares of other EV makers, like NIO (NIO), whose stock fell 0.3%.
Virgin Galactic (SPCE) stock dropped 7.1% after the space-tourism company’s latest report on Monday evening. It reported a loss of 55 cents a share, with no sales, while Wall Street had been looking for a 27-cent loss from $250,000 in sales. Commercial operations are supposed to ramp up in the third quarter of 2021.
Tyson Foods (TSN) stock slipped 0.2% after getting downgraded to Neutral from Overweight at Piper Sandler.
BioNTech (BNTX) stock dropped 2.9% after getting downgraded to Neutral from Buy at Bryan Garnier.
Nike (NKE) stock gave up an earlier gain to slip 0.4% after getting upgraded to Buy from Hold at Jefferies.
Dow Inc. (DOW) stock dropped 1.5% after getting downgraded to Neutral from Buy at Goldman Sachs.
Write to Jacob Sonenshine at [email protected]
