Stocks and index ETFs are falling for a sixth consecutive day on Tuesday, as fears of higher interest rates and a rotation into stocks linked to economic recovery are sinking technology.
The Nasdaq Composite tumbled another 2.2%, dropping below its key 50-day moving average for the first time since November. Meanwhile, the S&P 500 fell almost 1%, while the Dow Jones Industrial Average lost 0.5%, holding up slightly better than its fellow benchmarks.
Major stock ETFs are dropping on Tuesday as well. The SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY), and Invesco QQQ Trust (QQQ) are all lower just after 12:15 PM EST.
Powell’s Testimony
After tumbling lower, stocks attempted to recover some of those losses after Federal Reserve Chair Powell’s prepared testimony to Congress noted that fears of rising prices were not clear, and that inflation was ‘soft’, suggesting that the central bank may be likely to stay the current course in terms of monetary policy. Powell said the economic outlook still remains ‘highly uncertain’.
“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” the Fed chief said in prepared remarks for the Senate Banking Committee.
“Mr. Powell presumably wants to try to persuade markets that a strengthening economy does not necessarily mean that rates have to rise. Good luck with that when the post-Covid surge in activity [becomes]clear,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Investors have been spooked by inflation recently as bond yields have jumped, leading to a potential increase in bank borrowing rates. However, lawmakers are still looking to pass an additional round of economic stimulus as the coronavirus infection rate continues to fall.
“Powell remained very dovish,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in a note. “The Fed is focused on employment and seems very willing to absorb higher inflation and excesses in financial market that brings financial instability in hopes of getting there.”
Tech stocks contained in ETFs like the Vanguard Information Technology ETF (VGT) are suffering most recently, as they tend to be at the mercy of higher interest rates. But tech stocks also benefitted the most during the pandemic, and so investors have also booked profits amidst the uncertainty.
The Russell 2000 is also under pressure, with the index dropping 1.9% Tuesday. Related ETFs like the Principal U.S. Small-Cap Multi-Factor Index ETF (NASDAQ: PSC) are continuing to trade in the green. Small cap stocks have been outperforming the S&P 500 in 2021 amid optimism regarding a vaccine rollout and economic reopening.
“The sell-off in tech darlings and much-loved small-caps could be interpreted as the beginnings of market jitters,” said Chris Larkin, managing director of trading and investing product at E-Trade. “That’s not to say that equities have run their course, it’s more like cyclical sectors like energy and financials are more attractive, while tech takes a backseat.”
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