The Nasdaq Composite Index has recently fallen into its 70th correction territory in history. This drop comes as long-term Treasury yields continue to surge, increasing borrowing costs and putting pressure on stocks.
Impact of Interest Rates
Earlier this year, the Nasdaq COMP experienced significant gains, driven in part by optimism surrounding a potential pivot from the Federal Reserve away from rate hikes to combat inflation. However, stocks have faced challenges in recent months as the Fed has reiterated its stance that interest rates will remain higher for an extended period.
On Wednesday, the tech-heavy equity index plunged 2.4% and closed below the critical threshold of 12,922.216. This represents a drop of at least 10% from its previous peak set in mid-July at 14,358.02, as reported by Dow Jones Market Data. Consequently, this meets the common definition for a correction in an asset’s value.
Long-Term Treasury Yields Impact
According to Robert Pavlik, senior portfolio manager at Dakota Wealth Management, the substantial increase in long-term Treasury yields has unsettled investors. This is especially true for those holding highflying, high-growth technology stocks, as rising interest rates can have a particularly corrosive effect on these investments.
To illustrate his point, Pavlik makes a comparison to a lottery winner’s spending power. Winning when rates are at 2% is vastly different from winning when rates are closer to 10%.
Overall, the recent decline in the Nasdaq Composite Index is a reflection of the market’s response to rising long-term Treasury yields and their impact on borrowing costs and technology stocks. This correction marks a significant moment for the index since its inception in February 1971.
Nasdaq’s Recovery Faces Obstacles with Rising Treasury Yields
According to financial expert Pavlik, the recent surge in the 10-year Treasury yield (BX:TMUBMUSD10Y) to 4.952% on Wednesday may have a dampening effect on the recovery of the Nasdaq. He anticipates that the yield could reach a peak of 5.25% to 5.5%, further complicating the situation for the tech-heavy index.
Historical data from Dow Jones Industrial Average reveals that, on average, it takes about three months for the Nasdaq to bounce back from previous corrections. After this period, the index tends to post a 14.4% gain on average within a year.
The impact of Wednesday’s turbulence was particularly felt in the shares of high-growth technology companies like Alphabet Inc. (GOOG), whose stocks plummeted by 9.5%. The earnings report failed to overshadow the underwhelming performance of Google Cloud business. Furthermore, this negative sentiment spilled over to rival cloud computing giant Amazon.com Inc. (AMZN), with its shares dropping by 5.6%.
The pressure is visible on well-known stocks, acknowledges Pavlik, but he remains optimistic that this situation will eventually come to an end. Nevertheless, concerns regarding the Federal Reserve’s actions continue to loom large in investors’ minds.
While the Nasdaq has maintained a steady 22.5% increase year-to-date until Wednesday, the Dow Jones Industrial Average (DJIA) observed a slight decline of 0.3%. In contrast, the S&P 500 index (SPX) saw a noteworthy gain of 9% in 2023, as reported by FactSet.