The Dow Jones Industrial Average jumped to another record high on Friday as rising reopening optimism continued to encourage the rotation into cyclical stocks. Meanwhile, surging bond yields rekindled valuation fears and took the comeback momentum out of tech names.
The 30-stock benchmark climbed 293.05 points, or 0.9%, to close at a record at 32,778.64. Bank stocks gained amid rising rates, while industrials continued their strength on the back of new stimulus. Goldman Sachs shares jumped 2%, and JPMorgan climbed 1.2%. Boeing and Caterpillar popped 6.8% and 4.2%, respectively.
The S&P 500 erased earlier losses and inched up 0.1%, eking out a record close of 3,943.34. Tech and communication services were the only two sectors registering losses. The Nasdaq Composite shed 0.6% as rates surged. Alphabet and Facebook dropped 2% each, while Apple, Amazon and Microsoft all closed in the red.
The 10-year Treasury yield jumped 10 basis points to 1.64% at its session high Friday, hitting its highest level since February 2020. The benchmark rate started 2021 at around 0.92%.
The rapid rise in bond yields prompted investors to dump the Nasdaq names again after a brief rebound earlier this week. Sharp increases in interest rates can put outsized pressure on high-growth tech stocks as they reduce the relative value of future profits.
"Higher rates, less dovish central banks are now considered to be the single biggest threat for risk assets," Ralf Preusser, Bank of America's rates strategist, said in a note. "With the passage of the US fiscal stimulus package and the blistering progress in vaccinations in the US, a number of other key risks are falling by the wayside."
Ned Davis Research estimated that the Nasdaq 100, the tech heavy index which tracks the 100 largest non-financial companies in the Nasdaq Composite, would drop another 20% if the 10-year yield hits 2%.
Friday's sell-off pared the Nasdaq's weekly gain to 3%. The S&P 500 rose 2.6% this week, while the blue-chip Dow outperformed with a 4% rally. The Russell 2000 advanced 0.6% to a record Friday, bringing its gains this week to more than 7%.
"I think the story is becoming very, very clear in the tech sector. We have incredibly high valuations and yields that have tripled from the low last year," said Robert Conzo, CEO of The Wealth Alliance. "You are going to see a lot of volatility in the tech sector. There's a better trade out there in the cyclicals."
Investors piled into names tied to an economic recovery after President Joe Biden's $1.9 trillion Covid-19 relief package became law.
Biden's much-anticipated relief bill will send direct payments of up to $1,400 to many Americans as soon as this weekend, and will also put nearly $20 billion into Covid-19 vaccinations and $350 billion into state, local and tribal government relief.
Biden announced Thursday evening that he would direct states to make all adults eligible for the vaccine by May 1 in his first primetime address as president. Biden also set a goal for Americans to be able to gather in person with their friends and loved ones in small groups to celebrate the Fourth of July.