A tough week on Wall Street got worse yesterday with the technology-focused Nasdaq index shedding 3.5% on Thursday in what is starting to look like a correction developing after months of a raging bull market. The Nasdaq may have suffered the heaviest loss but Wall Street’s other major indices also dropped. The Dow Junes industrial average fell back from a record close on Wednesday to slide 1.75% and the S&P 500 finished 2.4% down.
It has been the growth stocks that have recorded the biggest gains over recent months that have seen most of the week’s sell action. Investors have begun to bank profits as fears over a period of high U.S. inflation were stoked by bond yields hitting a one-year high. Bond yields are being boosted by expectations of a strong recovery for the American economy and rising inflation.
The growing possibility of higher borrowing costs has particularly hit the share price of the biggest and highest growth technology companies listed on Wall Street’s exchanges. The FAANG stocks of Facebook, Apple, Amazon, Netflix and Google-holding Alphabet have all taken a tumble in recent days. The correction brings to a halt record-breaking rallies stretching back almost a year.
Despite repeated assurances from US Federal Reserve chairman Jerome Powell that the central bank is unlikely to change its interest rates policy for “some time”, bond yields have continued to rise. Last month the Fed’s key rate-setting open market committee voted to hold rates and asset purchase programmes steady while the world’s largest economy starts its recovery from the impact of the Covid-19 pandemic which has killed half a million people in the country.
Jefferies analyst Christopher believes the underlying issue is, however, less about core economic data and more about growing unease in markets. He commented:
“Experience has long since demonstrated that the Fed is moved by markets and not the other way round. The more the stock market goes vertical and the more the Treasury bond market sells off, the more pressure will build on the Fed to acknowledge the reality that policy is way too easy.”
The prospect of monetary policy and stimulus programmes being tightened to cool markets is raising concerns about interest rates among market participants. Randy Frederick of the Schwab Centre for Financial Research believes this week’s sell-off of growth stocks has been “all about” interest rates worries.
He forecasts the wider technology sector, which he told Bloomberg News “has been a relative outperformer”, can expect to find itself to again be the protagonist if markets move into reverse:
“As it led on the way up, it will likely lead on the way down, too.”