Stock market crash? No, but rising bond yields are causing a stressful turnover below the surface

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No matter the hashtags, the stock market remains far from “crash” territory, like anyone with a working memory of the sell-off inspired by last March’s pandemic, let alone the 2008 global financial crisis, the dot-com bubble that burst in 2000 or October 1987, I would recall. But a rotation away from market leaders in the pandemic era, inspired by a sudden spike in bond yields, certainly appears to be underway and the volatile moves may be unsettling for some investors.

That could help explain why the term #stockmarketcrash was trending on Twitter on Thursday, despite the fact that the Dow Jones Industrial Average DJIA, -1.11% and the S&P 500 SPX, -1.34% are still far from even in what is known. known as a market correction, defined as a 10% retracement from a recent peak. However, the question investors should ask themselves before sounding the alarms is whether the price action is surprising or out of the ordinary, Brad McMillan, chief investment officer at Commonwealth Financial Network, told MarketWatch in a telephone interview. And the answer is no, given that a support in bond yields, which seems largely to reflect increasingly optimistic economic expectations, appears to be the main culprit, McMillan said. While the high-tech Nasdaq Composite COMP, -2.11% on Thursday entered correction territory, defined as a 10% drop from a recent peak, the Dow Jones Industrial Average DJIA, -1.11% is still alone. 3.4% below its all-time high. set last month. The S&P 500, the US large-cap benchmark, was less than 5% below its recent record high. Thursday’s market weakness echoed the wobble seen last week. Both selling episodes were sparked by a sell-off in the Treasury bond market, which boosted yields. The yield on the TMUBMUSD10Y 10-year Treasury note, 1.546%, which last week soared to a more than a year high at 1.6%, fell back above 1.5% on Thursday. Federal Reserve Chairman Jerome Powell’s remarks did not appear to assuage concerns that a possible spike in inflation could cause the central bank to start reducing monetary stimulus earlier than expected, despite his promise to let it go. the economy will accelerate.

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To keep the movements of the day in perspective, the Nasdaq ended with a loss of 2.1. The Dow Jones fell more than 700 points at its session low, ending the session with a loss of 345.95 points, or 1%. The S&P 500 lost 1.2%. Those are sharp daily drops, but not extraordinary. And it‘s not unusual for stocks to start to retreat as yields start to climb, McMillan noted. It’s also not surprising that high-growth stocks, whose valuations have been stretched in the post-pandemic rally, are hit the hardest by the selling pressure. Investors appear to be profiting from those high flights and using the proceeds to buy stocks in companies in sectors that are more sensitive to the economic cycle. While rising returns can be a positive sign in the early stages of a bull market, indicating stronger economic growth going forward, market turnover can be disconcerting for some investors, said Lindsey Bell, chief strategist. Ally Invest investment, on a note. “And higher yields tend to affect high-flying ones more. That is why we have seen stocks like Tesla TSLA, -4.86% and Peloton PTON, -3.08% fall more than 30% this year, “he said. Indeed, the huge weighting of technology and technology-related stocks in the major indices may leave them vulnerable to weakness as that process takes hold. Mega technology and discretionary share price action: Apple Inc. AAPL, -1.58%, Microsoft Corp. MSFT, -0.36%, Amazon.com Inc. AMZN, -0.91%, Facebook Inc FB, + 0.87%, Google parent Alphabet Inc. GOOG, + 1.10% GOOGL, + 1.12%, Tesla Inc. and Nvidia Corp. NVDA, -3.39% – now represent 24% of the S&P 500, noted the technical analyst Mark Arbeter, president of Arbeter Investments. Need to know: Buy this dip in Apple, Microsoft, and these other tech stocks before they’re out of reach, says the analyst. “Weakness in large-cap technology has been weighing on overall market averages, raising concerns of an upper market and the end of the cycle. From our perspective, amplitude remains strong, a characteristic that is not normally present at the highest points in the market, ”said Kevin Dempter, an analyst at Renaissance Macro Research, in a note Thursday. Related: Stock Market’s Most Sensitive Sector Says Cycle Is Nowhere Near Turning Small Cap Discretionary Stocks Are At Absolute Highs As Well As Multi-Year Highs Relative To Large Cap Discretionary Stocks, He said, That is a sign of broad-based participation. Trends are also strong for sectors, such as energy and banks, which tend to be the winners in higher-performing environments, while groups more sensitive to the economy such as transportation and services are also benefiting. “Rather than an upper market, we believe this is revolving in nature with limited downsides, and in the future we want to be overweight high-yield winners like banks and energy, as there is likely to be outperformance in these groups in the future. future, ”Dempter wrote. So what about that accident? After recent bond-inspired setbacks, the Dow and S&P 500 remain far from correction territory, much less a bear market, which is defined as a 20% decline from a recent peak. Not all bear markets are the product of a crash. And crash, by itself, is a more nebulous term, implying a sudden, sharp fall. Some analysts define a drop as a one-day drop of 5% or more. Others see a typical dip as a sharp, sudden drop that takes the market into a bear market and beyond in a matter of a few sessions. That was the case last year when it became clear that the COVID-19 pandemic would bring the economy of the United States and the world to a near halt. The S&P 500 fell from a record close on February 19, falling about 34% before bottoming out on March 23. From those March lows, the S&P 500 is still up nearly 72%, while the Dow is up nearly 70%. And even with its recent pullback, the Nasdaq is still up more than 90% during that stretch.