Stocks hovered around the flatline on Tuesday as traders weighed rising interest rates and a potential economic recovery from the coronavirus pandemic.
The Dow Jones Industrial Average rose just 7 points. The S&P 500 was 0.2% lower along with Nasdaq Composite.
Facebook, Netflix and Alphabet all fell more than 2%. Microsoft and Apple traded lower by 1.7% and 1.1%, respectively. Amazon lost 0.6%. Those losses for Big Tech follow a rise in U.S. interest rates.
The benchmark 10-year note yield rose to 1.168%, hitting its highest level since March. The 30-year bond rate climbed 1.89%.
“There has been a short-term tone shift in the market,” wrote Gregory Faranello, head of U.S. rates at AmeriVet Securities. “Markets have shifted in mindset as the Democratic ripple is digested short-term. The focus now turning to growth and inflation and perhaps a combination of both.”
Rates have been on the rise since Democrats secured majorities in both the House and Senate, opening up the door for additional fiscal stimulus. Last week, President-elect Joe Biden promised an economic stimulus rollout, which he said will be “in the trillions of dollars.”
However, higher rates could make it more expensive for tech companies — which have been the market leaders throughout the pandemic — to keep growing their businesses through additional debt issuance. This could, in turn, put pressure on the broader market at a time when some investors are concerned about high stock valuations.
The S&P 500’s forward price-to-earnings ratio was at 22.7, near its highest level since 2000. DoubleLine Capital CEO Jeffrey Gundlach pointed out on Monday that stock valuations are high relative to historical standards, and are being underpinned solely by stimulus measures from the Federal Reserve.
“We’ve been concerned that stretched valuation multiples could get more stretched, setting the stage for a meltdown,” wrote Ed Yardeni, CIO of Yardeni Research. “On the other hand, we are relieved to see corporate earnings continue to recover along with the US economy from the unprecedented two-month lockdown recession during March and April of last year.”
Stocks were coming off a losing session, with the major averages closing lower on Monday.
“Historically, when momentum and sentiment indicators are this stretched, the market is due for a period of consolidation,” said Nationwide’s Chief of Investment Research, Mark Hackett.
Stocks are coming off a strong week of gains that brought all three major averages to record highs. Stocks shrugged off riots at the U.S. Capitol that led to the House Democrats introducing an article of impeachment on Monday against President Donald Trump for inciting the attack.
Since then, several social media companies have suspended or banned Trump from their platforms. In some cases, this has put pressure on their stocks. Twitter fell 2.6% on Tuesday, and is down 8.8% this week. Facebook has lost 6% week to date.
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