Stocks continued to slide Monday, with technology stocks getting hit the hardest as bond yields rose to new pandemic highs and concerns about Federal Reserve monetary policy dominated the market.
“The market has gotten off to a chilly start with stocks seemingly still digesting the FOMC minutes surprise—with the Fed revealing a more aggressive agenda,” wrote Chris Larkin, managing director of trading at ETrade. The Fed released its December minutes last Wednesday.
The Nasdaq is trading almost 9% below its all-time high, hit in late November. At its current level just over 14,500, the Nasdaq isn’t far from correction territory—defined as a 10% drop from a high—which the 14,451 level would represent.
Markets are still adjusting to the expected tighter monetary policy from the Fed. As high inflation looks like it’s here to stay, the Fed is planning on raising interest rates several times this year. It is also considering reducing the size of its balance sheet, which means less demand for bonds.
The expectation of higher short-term interest rates and a reduction in the balance sheet sent the price of the 10-year Treasury note down and the yield up to as high as 1.8%. That’s a new pandemic-era high. Higher long-dated bond yields make future profits less valuable and many tech companies are valued on the expectation of sizable profits many years in the future.
“The Federal Reserve is walking a tight rope by trying to halt inflation and it is common to see market valuations contract as the market weighs what the future looks like, especially in growth companies whose earnings are all in future dollars,” wrote Tim Pagliara, chief investment officer at CapWealth.
Higher short-term rates could also slow down economic growth, and that’s not helping more economically-sensitive sectors. The 2-year Treasury note’s yield is up to 0.89% from a Friday close of 0.87%. That shows that markets are convinced that the Fed will lift its short-term benchmark lending rate—currently at 0%—more than once.
On Wednesday, inflation data will hit the wires, with economists expecting a 7.2% year-over-year rise in the consumer-price index, according to FactSet. Markets will be looking for cues as to when inflation will have peaked. The hotter inflation is, the more likely the Fed is to move quickly in removing monetary support from the economy and markets.
Elsewhere, major banks will report earnings later this week. JPMorgan Chase & Co. (ticker: JPM) and Wells Fargo (WFC) will report results on Friday. Investors will be watching to see if higher interest rates have slowed demand for loans.
Here are six stocks on the move Monday:
Royal Caribbean (RCL) was down 1.7%. The cruise line said Friday that it would cancel a number of coming cruises over the more contagious—but apparently milder—Omicron variant of coronavirus.
Take-Two Interactive Software (TTWO) stock fell 14% Monday after news broke that the company is buying Zynga (ZNGA) for $12.7 billion. That’s almost double Zynga ‘s market capitalization at Friday’s close and that stock is up 44% Monday.
Generac (GNRC) stock fell 0.2% even after getting upgraded to Buy from Neutral at UBS.
Nike (NKE) stock dropped 5.2% after getting downgraded to Hold from Buy at HSBC Securities.