Dow rallies 2%, heads for biggest gain in nearly 4 months as bond yields decline

Dow rallies 2%, heads for biggest gain in nearly 4 months as bond yields decline

The Dow Jones Industrial Average headed for its biggest gain in nearly 4 months, jumping more than 2% as Treasury yields retreated.

Spiking rates last week raised fears about inflation and too-high equity valuations.

The Dow jumped 686 points, or 2.2%, led by Boeing which climbed 6.8%, on pace to post its best day since November 9. The S&P 500 gained about 2.1% as all 11 sectors traded in the green. The Nasdaq Composite, the tech heavy index that got hit hard last week, also popped 2.1%.

The 10-year Treasury yield dipped to 1.42% on Monday, off by 4 basis points from Friday and down from its recent high of 1.6% on Thursday. As yield fell lower, stocks extended their gains on Monday.

Market breadth was strong on Monday with only about 8 stocks trading lower in the whole S&P 500. On the NYSE, 11 stocks advanced for every one that declined. Economic reopening plays like Carnival and American Airlines were higher by at least 3% amid optimism on vaccines. Meanwhile, high-growth tech shares outperformed as rates fell. Apple and Tesla both rose 3%.

“Investors ask whether the level of rates is becoming a threat to equity valuations. Our answer is an emphatic ‘no,'” David Kostin, Goldman Sachs’ chief U.S. equity strategist, said in a note to clients. “Our bullish US equity view has already embedded expectations of rising interest rates.”

Boosting sentiment on the vaccine front, the Centers for Disease Control and Prevention advisory panel voted unanimously Sunday to recommend the use of Johnson & Johnson‘s one-shot Covid-19 vaccine for people 18 years of age and older. The company expects to ship four millions doses initially.

The sudden spike in the benchmark yield rattled stocks last week as rising rates can threaten the relative appeal of equities and compress stock valuation by reducing the value of future cash flows. Last week, the blue-chip Dow and S&P 500 lost 1.7% and 2.5%, respectively. The technology-heavy Nasdaq dropped more than 4% during the same period, after suffering its worst one-day sell-off since October on Thursday.

“Equity investors are still looking at the rise in rates mostly as ‘a good thing’ and not yet as a threat notwithstanding some shaking of the tree in high multiple stocks and other parts of the market last week,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “The benefits of the vaccines vs the challenge of higher rates will be the theme this year.”

On the stimulus front, the House passed a $1.9 trillion Covid relief bill, the American Rescue Plan Act of 2021, early Saturday. The Senate will now consider the legislation. 

The major averages rose for the month of February, bolstered by a strong earnings season, positive news on the vaccine rollout and hopes of another stimulus package.

The Dow gained 3.15% for its third positive month in four in February. The S&P 500 gained 2.61% and the Nasdaq Composite gained nearly 1% for its fourth positive month in a row.

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