A trader works on the floor of the New York Stock Exchange.
The major averages took steep losses to start the week as investors continued their rotation out of technology stocks amid rising bond yields.
The Dow Jones Industrial Average fell about 350 points, despite a large gain in Merck. The S&P 500 shed 1.3%. The technology-focused Nasdaq Composite was the relative underperformer, dipping roughly 2.1%.
Large tech shares like Apple, Nvidia, Amazon and Microsoft were lower as investors eyed bond yields. A surge in rates to end September knocked highly valued tech stocks. The 10-year Treasury yield was slightly higher Monday, trading around 1.47%. The 10-year U.S. Treasury yield hit 1.56% last week, its highest point since June, with investors concerned about inflationary pressures and tighter monetary policy.
“The financial markets are adjusting leadership to reflect another Covid-induced reopening cycle,” said Jim Paulsen, Leuthold Group chief investment strategist. “That is, commodities are rising, bond yields are rising, cyclical sectors and small cap stocks are outpacing, and technology and growth stocks in general are underperforming.”
On the positive side, Tesla rose nearly 2% after the company said this weekend that it delivered 241,300 electric vehicles during the third quarter, well above analysts estimates.
Merck shares were up another 2%, following through on an 8% surge on Friday after the drug maker said its oral antiviral treatment developed with Ridgeback Biotherapeutics for Covid-19 reduced the risk of hospitalization or death by 50% for patients with mild or moderate cases.
Some airlines stayed in the green after Barclays upgraded the North American Airlines sector to positive from neutral. Southwest rose 2.8% after an upgrade to overweight from equal weight from the same analyst.
“At these extremely lofty valuations stock prices are very sensitive to modest changes in incremental capital flows and it appears that there is some ‘performance chasing’ going on as the energy space is attracting capital which is trying to make it look like they had exposure to oil & gas (window dressing) and that means less money flowing into tech,” said Mark Yusko, Morgan Creek Capital Management CEO and chief investment officer.
Friday marked the first trading day of October and the final quarter of 2021. The major averages rose that day on promising data for Merck’s oral treatment for Covid-19, which boosted stocks tied to the economic reopening.
The market rebound followed a rough September plagued by fears of inflation, Federal Reserve tapering and rising interest rates. The 10-year rate topped 1.56% last week, its highest point since June.
The S&P 500 finished the month down 4.8%, breaking a seven-month winning streak. The Dow and the Nasdaq Composite fell 4.3% and 5.3%, respectively, suffering their worst months of the year.
“The on-again, off-again nervousness about Federal monetary policy, the disruption among supply chains and the potential for higher taxes (along with other concerns such as inflation risk and higher taxes) have kept market enthusiasm in check,” wrote John Stoltzfus, Oppenheimer Asset Management’s chief investment strategist, in a note Monday. “Meanwhile rotation and rebalancing efforts along with some profit taking by skeptics, bears and nervous investors account for a significant part of market activity on any given day.”
“Curiously, investor worries about COVID-19 and its variant seem to have begun to play a lesser day-to-day ‘worry role’ in the markets of late than over the course of the summer,” he added.
The fourth quarter is typically a good period for stocks, but overhangs like central bank tightening, the debt ceiling, Chinese developer Evergrande and Covid-19 could keep investors cautious. Heading into the fourth quarter, more than half of all S&P stocks are off at least 10%.
The S&P 500 has averaged gains of 3.9% in the fourth quarter and was up four out of every five years since World War II, according to CFRA.
One of the first hurdles markets face in the new quarter is Friday’s closely watched employment report, which could spur the Federal Reserve’s decision on when to taper its bond-buying program.
Economists expect about 475,000 jobs were added in September, according to an early consensus figure from FactSet. Just 235,000 payrolls were added in August, about 500,000 less than expected.
“Markets this week are likely to take their cue from economic data as they look to Friday’s employment report for clues as to the strength of the US economy,” said Oppenheimer’s Stoltzfus.
—CNBC’s Patti Domm contributed to this report.