Dow leaps greater than 400 factors in wild reversal because the financial comeback rallies
US stocks reversed an earlier sell-off and jumped on Friday as a rally in bond yields subsided while a stronger-than-expected employment report supported sentiment.
The S&P 500 was last up 1.4% after losing 1% earlier. The Nasdaq Composite gained 1.4% in the volatile session. At its lowest point, the tech-heavy benchmark fell 2.6%. The Dow Jones Industrial Average rose 410 points.
The major averages rebounded from their lows as bond yields fell from their session highs. The US 10-year Treasury yield was last unchanged at 1.56% after falling above 1.6% to hit a 2021 high after data showed a surge in employment growth.
Stocks that would benefit from a swift economic comeback won on the employment report. The S&P 500 energy sector was up more than 3% while Occidental Petroleum was up nearly 6%. Financials and industrials each gained more than 1%, while commodities rose 2%.
Meanwhile, high valuation tech stocks were hit again by rising bond yields, continuing the week’s pattern. Higher interest rates reduce the present value of future cash flows and make long-term assets less attractive. Tesla fell more than 4%, bringing its weekly losses to 12%.
The Labor Department reported Friday that the number of non-farm workers rose by 379,000 for the month and the unemployment rate fell to 6.2%. This compares with the expectations of 210,000 new jobs and the unemployment rate, which according to the Dow Jones should remain stable at 6.3% in January.
“This was a welcome change in events for a downtrodden labor market as we begin to turn and reopen in a restrained economy,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “It seems the ship is headed in the right direction and the added incentive of Congress should be the wind in the sails to get the economy going again.”
However, the rise in interest rates fueled fears that growth-oriented technology companies that led the market rally last year could struggle to meet expectations if the cost of borrowing rises. Pandemic winners Peloton and Zoom Video are down 19% and 14% respectively this week. Red-hot investor Cathie Wood, who focuses on innovative companies, saw her flagship fund drop double-digit numbers this week, wiping out its 2021 profits.
Friday’s moves followed a steep sell-off on Thursday triggered by comments from Federal Reserve Chairman Jerome Powell on rising bond yields. The Fed chairman said the recent attempt caught his attention, but it gave no indication of how the central bank would curb it. Some investors had expected Powell to signal his willingness to adjust the Fed’s asset purchase program.
The economic reopening could “put some upward pressure on prices,” Powell said in a Wall Street Journal webinar Thursday. Even if the economy “sees a temporary spike in inflation … I assume we’ll be patient,” he added.
“There are really two things that equity investors are struggling with in our conversations that they may not have looked at in the past 10 years,” said Tom Lee, co-founder of Fundstrat’s research. “One is the potential that inflation will actually have to be priced into stocks. I think there is a lot of confusion.”
“Then it’s a bond market that seems to be testing the Fed, which is terrifying,” added Lee, who believes the sell-off this week is a buying opportunity.
– CNBC’s Maggie Fitzgerald contributed to the coverage