The Growth Stocks -- Small And Large ‐‐ Took It On The Chin This Week, As The 10‐Yr Yield Jumped 34 Basis Points To 2.71%. The Nasdaq Composite (‐3.9%) And Russell 2000 (‐4.6%) Fell More Than 3.5%, The S&P 500 Fell 1.3%, And The Dow Jones Industrial Average Fell 0.3%.
The primary catalyst for interest rates was Fed Governor Brainard's (FOMC voter) expectations for the Fed's balance sheet to shrink considerably more rapidly than in the previous recovery, starting as early as May.
The March FOMC Minutes elucidated Mr. Brainard's hawkish mindset with the following note: Participants generally agreed it would be appropriate to reduce the balance sheet by $95 billion per month (about $60 billion for Treasury securities and about $35 billion for agency MBS) and that one or more 50 basis point increases in the fed funds rate could be appropriate at future meetings.
Shorter‐dated rates pushed higher, too, with the 2‐yr yield rising ten basis points to 2.52% amid rate‐hike expectations. Longer‐dated rates were further boosted by the March ISM Non‐Manufacturing Index, which showed the Prices Paid Index (83.8%) hit its second‐highest reading ever.
Essentially, the Fed news exacerbated concerns about the central bank potentially making a policy mistake that sends the economy into a recession, which would lower earnings prospects and valuations. The growth‐stock valuations were pressured by the rapid rise in rates this week.
The S&P 500 information technology (‐4.0%), consumer discretionary (‐3.3%), and communication services (‐2.7%) sectors, which are home to the mega‐caps, were influential weights on the benchmark index. The industrials sector (‐2.6%) was also weak amid continued bleeding in the transportation space.
Conversely, the energy sector (+3.2%) joined the defensive‐oriented health care (+3.4%), consumer staples (+2.7%), utilities (+1.9%), and real estate (+0.8%) sectors in positive territory for the week.
Separately, it's worth reminding readers that the growth stocks did catch a speculative bid on Monday after Elon Musk disclosed a 9.2% stake in Twitter (TWTR). Mr. Musk was subsequently named to the company's Board of Directors and reclassified his stake to an active position.
The S&P 500 ended the week below its 200‐day moving average (4493).