The Nasdaq Composite fell sharply for the second-straight day on Tuesday as higher interest rates appeared to put pressure on high-flying tech stocks.
The tech-heavy index was down 1%, while the S&P 500 shed roughly 0.3%. The Dow Jones Industrial Average was the relative outperformer, shuffling between gains and losses.
The decline in tech stocks comes as Treasury yields have jumped following President Joe Biden’s decision to renominate Fed Chair Jerome Powell. Higher rates are often seen as a negative for high-growth companies because their future earnings look less attractive as short-term yields rise.
“With a Powell-led Fed, we expect the speed of the QE taper to follow the data, likely speeding up if inflation prints continue at the pace of the October print with interest rate hikes to shortly follow the taper (June at current pace). The market believes this action will keep the Fed in control of inflation,” Aptus Capital Advisors portfolio manager John Luke Tyner said in a note to clients.
“While the market is expecting a more hawkish response to current inflation, time will tell if it will be enough, as Powell is well established in the dovish camp of FOMC policy,” he added.
In earnings news, shares of video conferencing company Zoom Video Communications tumbled 17% a day after it beat earnings estimates but warned of a slowdown ahead as the Covid pandemic winds down and the demand for remote contact decreases. Shares of Best Buy also fell sharply after the company said comparable sales and gross profit margin might decline in the fourth quarter compared to the year ago period.
On the positive side, chipmaker Western Digital was one of the best performers in early trading following an upgrade from Mizuho. Energy stocks also moved higher even after President Joe Biden announced on Tuesday that he would tap the strategic petroleum reserve in an attempt to lower gas prices at a time when inflation is running at its highest level in three decades.
Tuesday’s moves come after the market slid into the close in the previous session after the S&P 500 had hit an intraday record earlier in the day.
Stocks initially reacted positively to the announcement that Federal Reserve Chair Jerome Powell was nominated for a second four-year term by Biden, driving expectations that the central bank will stay on its monetary path as the economy recovers from the pandemic and attempts to combat inflation. However, markets reversed course towards the end of the session and yields continued to rise.
At Monday‘s close, the Dow Jones Industrial Average was up just 17 points, after being up more than 300 points at one point in the session. The S&P 500 fell 0.32%, and the tech-heavy Nasdaq Composite dropped 1.26% despite hitting its own intraday record earlier in the session.
While trading is likely to slow because it’s Thanksgiving week and the Fed chief decision is behind the market, investors will be watching some economic data coming out Tuesday, including the Philly Fed. Additional data out later in the week includes weekly unemployment claims, a GDP update, personal income, and consumer confidence reads.
“It is Thanksgiving week, so the next few days will likely be extremely low volume and probably won’t have many fireworks,” said Ryan Detrick, chief financial strategist at LPL Financial. “Still, Wednesday will bring the latest Fed minutes and the Fed’s favorite measure of inflation in the PCE, so we could have something to think about before we go off and eat a lot of turkey.”
Investors are also juggling concerns about coronavirus overseas. German Chancellor Angela Merkel warned that the country was seeing a spike in the virus.
“Although Covid case counts are up around the globe, there is not much evidence that it is shutting down the U.S. economy again as it has in the past,” said Jim Paulsen, chief investment strategist for Leuthold Group. “For example, travel forecasts for the Thanksgiving holiday are the strongest since before the pandemic.”
U.S. markets will be closed for the Thanksgiving holiday on Thursday. The stock market closes early at 1 p.m. ET on Friday.