U.S. markets and stock exchange traded funds rallied Tuesday, with the technology-heavy Nasdaq surging after previously dipping into a correction.
On Tuesday, the Invesco QQQ Trust (NASDAQ: QQQ) was up 4.4%, SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) gained 0.9%, and iShares Core S&P 500 ETF (NYSEArca: IVV) was 2.1% higher.
“Usually when things are significantly sold off, like the tech sector, traders tend to buy in,” Matthew Stucky, portfolio manager at Northwestern Mutual Wealth Management, told Reuters.
Technology shares retreated Monday on signs that the $1.9 trillion coronavirus relief package was nearing final approval, which fueled inflation fears and added to a spike in yields. Yields on benchmark 10-year Treasury notes have since eased off after hovering near 13-month highs.
Rising interest rates disproportionately hurt high-growth tech companies since investors value them based on earnings expected years into the future. Rising rates reduce the value of future earnings more than those in the short-term.
“Potential headwind for the market is (when) interest rates rise further from this point over the short period … since they have risen too fast in too little time,” Michael Sheldon, chief investment officer at RDM Financial, told Reuters.
The stabilizing bond market is expected to help tech shares recover lost ground. Market observers also pointed to ongoing trends that will continue to support the sector, such as increased online shopping and at-home access to media, entertainment, and computing options, even as Covid-19 lockdowns ease.
“It is this buy-the-dip mentality,” Daniel Morris, chief market strategist at BNP Paribas Asset Management, told the Wall Street Journal. “It’s not like we’ve changed our long-term view on tech. Everyone expects it to do well—it was just really expensive.”
Some also anticipate a rebound in the bond markets as appetite for U.S. government debt revives in response to the the sharp jump in yields.
“We think a big part of the bond-yield move has played out,” Hani Redha, a portfolio manager at PineBridge Investments, told the WSJ. “At this level of yields, we do expect additional buyers to come in. That tends to stabilize the yield level.”
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