Rising bond yields triggered a broad sell-off on Wall Street Thursday that erased the market’s gains for the week and handed the Nasdaq composite its biggest loss in nearly four months.
And in the biggest surprise of the week, shares of GameStop suddenly shot higher again, rising 18.6% Thursday after surging 75% in the last hour of trading Wednesday, after weeks of going dormant.
The S&P 500 dropped 2.4%, led lower by heavy selling in technology and communications companies. The tech-heavy Nasdaq fell 3.5%, its biggest skid since October.
The sell-off took hold when the yield on the 10-year U.S. Treasury note rose to 1.53%, a level not seen in more than a year and far above the 0.92% level it was trading at only two months ago.
Bond yields have been rising this month, reflecting growing confidence among investors that the economy is on the path to recovery, but also concern that inflation is headed higher. And every tick up in bond yields recently has corresponded with a tick down in stock prices.
Thursday’s move in the 10-year Treasury yield raised the alarm on Wall Street that yields, and the interest rates they influence, will move higher from here.
“The yield on the 10-year note crossed the line in the sand at 1.50%, which from a technical perspective further confirms that higher rates are likely,” said Sam Stovall, chief investment strategist at CFRA.
The S&P 500 index fell 96.09 points to 3,829.34. The Dow Jones Industrial Average lost 559.85 points, or 1.8%, to 31,402.01. The Nasdaq slid 478.54 points to 13,119.43.
GameStop shares
Thursday’s gain for GameStop, which topped 101% before shrinking, came even as most stocks across Wall Street fell sharply on worries about rising interest rates. The moves are reminiscent of the shocking 1,625% surge for GameStop in January, when bands of smaller and novice investors communicating on social media launched the struggling video game retailer’s stock.
That initial supernova heightened questions about whether the broader market was in a bubble and whether a new generation of traders should be able to take full advantage of the free trades available on their phones. Global markets swooned momentarily; Congress held a hearing.
No clear reason seems to be behind this most recent move, leaving market observers to grasp at what little news is out there, but it does demonstrate the increased power that regular investors suddenly have.
One major piece that drove last month’s surge is not as big a player this time around: a huge build-up of what’s called “short interest,” or bets by investors that the stock is set to fall. After short-selling funds got badly burned by last month’s sudden surge, many fewer GameStop shares are being sold short now. That means this pop may not reach last month’s heights.
“It’s like dropping a ping-pong ball on the table,” said Sam Stovall, chief investment strategist at CFRA. “The first bounce is the greatest while subsequent bounces are a bit more muted. We’re still getting a bounce, but it’s probably not going to drive up GameStop to $500 a share.”
Economy grew
The economy grew at an annual pace of 4.1% in the final three months of 2020, slightly faster than first estimated. The influx of new government stimulus efforts and accelerated vaccine distribution could lift growth in the current quarter, ending in March, to 5% or even higher, economists believe.
“The bond market is reacting to the positive economic growth,” said Brent Schutte, chief investment strategist, Northwestern Mutual Wealth Management Company. “It means there’s some hope on the horizon.”
Technology stocks, which tend to have higher valuations, have been one of the victims of the rise in bond yields. As bond yields climb, more investors shift money into those higher yielding assets, which tends to negatively impact stocks that are priced for growth and not for regular dividend payouts.
Apple, Amazon, Facebook and Microsoft — all companies that pushed the stock market higher last year — fell 2.4% or more.
The market will likely see broader growth as actual economic growth widens to include many of the sectors that have been beaten down during the pandemic, Schutte said.
Smaller company stocks fared worse than the rest of the market. The Russell 2000 index of smaller company stocks lost 84.21 points, or 3.7%, to 2,200.17. The index has been far outpacing larger indexes, a signal that investors expect broader growth to continue. Schutte noted improvements in retail sales, the housing market and consumer confidence.
“All those things are strong right now and the backdrop for further gains is still there,” Schutte said.
Global stock markets have soared over the past six months on optimism about coronavirus vaccines and central bank promises of abundant credit to support struggling economies. Those sentiments have faltered due to warnings the rally might be too early and that inflation might rise.
On Wednesday, Federal Reserve Chair Jerome Powell affirmed the Fed’s commitment to low interest rates in a second day of testimony to legislators in Washington.
The central bank earlier indicated it would allow the economy to run hot to make sure a recovery is well-established following its deepest slump since the 1930s. Powell said it might take more than three years to hit the Fed’s target of 2% inflation.
Investors also are looking for Congress to approve President Joe Biden’s proposed economic aid plan. That includes $1,400 checks to most Americans. However, the plan faces staunch opposition from Republicans and is still subject to negotiations. Democrats have chosen to use the legislative process known as reconciliation that would allow them to pass the bill without GOP support.
GameStop jumped 18.6% a day after the video game retailer’s stock more than doubled. The stock has been mostly declining this month after skyrocketing 1,600% in January as a large group of investors on Reddit and other social media sites encouraged each other to drive up the shares at the expense of hedge funds betting the stock would go lower.
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