Stock-market benchmarks were mostly lower Monday, even as the Dow Jones Industrials benchmark shrugged off worries that rising bond yields could render equities, particularly highflying tech shares, too expensive.
What are major indexes doing?
- The Dow Jones Industrial Average DJIA, +0.46% rose 143 points, or 0.5%, to 31,637, after trading as low as 31,287.
- The S&P 500 SPX, -0.20% was off 6 points, or 0.2%, at 3,901.
- The Nasdaq Composite COMP, -1.41% slipped 184 points, or 1.3%, to 13,690.
What’s driving the market?
Long-term Treasury yields were on the climb again Monday, after last week notching their biggest rise in six weeks, sapping some enthusiasm of the stock-market bulls.
Higher “risk-free” yields can make it difficult to justify high valuations for equities, as it reduces the value of their future profits to investors. In a backdrop of rising rates and faster economic growth, technology companies with rapidly increasing earnings become less attractive to investors.
“Definitely, yields are the big thing,” Randy Frederick, vice president of trading and derivatives at Schwab Center for financial research, told MarketWatch, adding that investors also have been worried in recent weeks about the threat of “a big spike” in inflation.
Although, Frederick also thinks such fears are a little overblown, like the recent selloff tied to GameStop Corp. GME, +11.95%, it pointed to how vulnerable stock benchmarks trading near all-time highs remain to a selloff, due to any unexpected news, or even severe weather, a year into the pandemic. “When you are a tad off record highs, inflation scares or a storm could cause a pullback,” he said.
James Meyer, chief investment officer at Tower Bridge Advisors, pointed out that markets “could be entering a phase when the rise in rates moves to become investors’ primary focus,” he said. “Until now, the surge in growth has dominated the movement in stock prices.”
Yields have been boosted by expectations that aggressive rounds of fiscal spending on top of extraordinary loose monetary policy by the Federal Reserve will stoke near-term inflationary pressures. Meanwhile, equities stand near all-time highs and remain expensive when measured against a variety of valuation metrics.
Congress is expected to pass another round of aid spending set to come in near President Joe Biden’s $1.9 trillion package. Investors were also penciling in the possibility of a large, long-term round of infrastructure spending.
The rollout of vaccines and falling COVID-19 case levels also continued to stoke hope for an acceleration in economic activity this year even as the number of U.S. deaths nears a milestone of 500,000.
Rising yields and inflation worries were also seen underlining worries over a potential hawkish turn by the Federal Reserve, even though the central bank has committed to holding off until inflation moves above its 2% target.
“The difficulty for equity investors is that the further the Fed gets behind market forecasts both for GDP and rates, the greater the worry over a tantrum,” by market participants over a potential Fed tightening, said Sean Darby, global head of strategy at Jefferies, in a note.
The Fed’s deliberate efforts to displace market expectations by overshooting its 2% target should allow for further steepening of the yield curve, while real, or inflation-adjusted, rates remain negative, allowing cyclicals and companies with low variable costs to outperform, he said.
Energy shares, one of the most beaten-down sectors in Wall Street, saw strong gains on Monday. The S&P 500’s energy constituents were up 4.6% on pace to recover back to their February highs, including Marathon Oil Corporation MRO, +11.73%, which was up 9.5%.
Fed Chairman Jerome Powell is set to testify before Congress on monetary policy this week.
Leading economic indicators increased 0.5 points in January to a reading of 110.3. Economists had expected the index to show a rise of 0.4 points.
Which companies are in focus?
- Shares of Dow component Boeing Co. BA, -0.17% rose 0.3% after United Airlines Holdings Inc. UAL, +6.30% said it is temporarily removing Boeing 777 planes from service after an engine blew apart in flight over the weekend. Boeing recommended grounding aircraft with that model engine. Shares of Raytheon Technologies Corp. RTX, -0.51%, the parent of Pratt & Whitney, which made the engine, slid 0.3% while United’s stock rose 7%.
- Shares of Kohl’s Corp. KSS, +7.54% jumped 9% after The Wall Street Journal reported that a group of activist investors have taken a big stake in retailer in an attempt to take control of its board.
- Goodyear Tire & Rubber Co. GT, +20.12% said Monday it would acquire Cooper Tire & Rubber Co. CTB, +30.20% in a deal with an enterprise value of about $2.5 billion. Cooper shares jumped 30%, while Goodyear shares rose 20%.
- New York-based M&T Bank Corp. MTB, +3.26% announced Monday it had reached an agreement to buy Connecticut-based People’s United Financial Inc. PBCT, +14.89% in an all-stock deal valued at $7.6 billion. People’s United shares rose 14.7%, while M&T shares were up 3%.
- Forterra Inc. FRTA, +5.55%, a maker of water and drainage infrastructure pipes and products in the U.S., said Monday it has agreed to be taken private by Quikrete Holdings Inc. in a cash deal valued at about $2.74 billion.
- Shares of Royal Caribbean Group RCL, +12.44% rose 11.1%, after the cruise operator swung to a narrower-than-expected loss but reported revenue that tumbled more than forecast
Which assets are on the move?
- U.S. crude oil futures CL.1, +3.90% climbed over 3% to $61.25 a barrel on the New York Mercantile Exchange, lifting shares of energy-related companies.
- Gold futures GC00, +1.68% climbed $31, or 1.7%, to settle at $1,808.40 an ounce.
- The 10-year Treasury note yield TMUBMUSD10Y, 1.352% was up 2 basis points to 1.365%, briefly threatening to touch 1.40% in overnight trading. Bond prices move in the opposite direction of yields.
- In overseas stock markets, the Stoxx Europe 600 SXXP, -0.44% fell 0.4% and the U.K.’s FTSE 100 UKX, -0.18% was down 0.2%. The Nikkei NIK, +0.46% rose 0.5%, while the Shanghai Composite COMP, -1.41% tumbled 1.5%.
-With reporting contributed by Joy Wiltermuth