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Feb. 25, 2021, 4:36 p.m. EST

Dow tumbles 560 points for worst percentage fall in 3 weeks as bond yields surge

By Mark DeCambre and Sunny Oh

Stock-market benchmarks finished sharply lower on Thursday, after a surge in bond yields inspired a bout of fierce selling in equities amid concerns over tighter borrowing conditions down the road.

Investors also fretted higher bond rates could sap the relative attractiveness of buying stocks to the benefit of fixed-income investments.

What did major indexes do?

  • The Dow Jones Industrial Average (DOW:DJIA) fell 559.85 points, or 1.8%, to 31,402.01, marking its biggest daily point and percentage drop since Jan 29.

  • The S&P 500 (S&P:SPX) tumbled 96.09 points, or 2.5%, to end at 3,829.34, its biggest fall in over three weeks.

  • The Nasdaq Composite (NASDAQ:COMP) slid 478.54 points, or 3.5%, to 13,119.43, booking its biggest one-day loss since September.

  • The small-cap Russell 2000 (USA:RUT) declined 3.5%.

On Wednesday, the Dow rallied nearly 425 points, or 1.4%, to close at a record 31,961.86, while the S&P 500 rose 1.1% and the Nasdaq advanced 1%.

In One Chart: The stock market’s COVID meltdown began a year ago: Here’s how every major asset has performed since then

What drove the market?

A fresh advance in bond yields generated friction stocks, a day after the Dow carved out an all-time high.

Positive developments on the vaccine front and soothing words from Federal Reserve Chairman Jerome Powell in back-to-back rounds of testimony before Congress Tuesday and Wednesday had appeared to ease jitters over rising bond yields and tighter borrowing conditions that had previously rattled stock-market investors.

But on Thursday markets were whipsawed anew.

Esty Dwek, head of global market strategy at Natixis Investment Managers, said that rising rates were extending a rotation out of tech and into other areas that might perform better in an improving economic environment. She told MarketWatch that that shift was helping spark turbulence in the market.

“The rotation into cyclicals is continuing/accelerating, funded by profit-taking in the more growth sectors like technology,” said Dwek.

Meanwhile, the 10-year Treasury note yield (XTUP:BX:TMUBMUSD10Y) surged above the 1.50%, later ending at 1.51%, up around 16 basis points since last Friday’s close. Yields and bond prices move in opposite directions.

The bond-market selloff was spurred inflation fears as fiscal stimulus and economic reopenings combined to induce intensifying price pressures.

“Investors are beginning to grasp there’s a bigger risk of inflation than before,” said Scott Clemons, chief investment strategist for Brown Brothers Harriman, in an interview.

“You could have a perfect storm of inflation, but the fear is the Fed would look at that and decide it’s just cyclical,” said Clemons.

On Thursday, Kansas City Fed President Esther George said that inflation could quickly rise once more Americans are vaccinated and the U.S. central bank should monitor price signals closely. St. Louis Fed President James Bullard said

Meanwhile, investors were digesting the latest weekly reading on those seeking unemployment benefits amid the COVID-19 pandemic, with initial state jobless claims dropping 111,000 to 730,000 in the week of Feb. 20. Economists had expected first-time jobless claims to come in at 845,000. The fall was larger than expected, but claims data has been erratic and unreliable lately, due to processing snafus, bad weather and other problems.

On the plus side, continuing state jobless claims declined 101,000 to 4.42 million. However, the number of people out of work from the pandemic remains very elevated.

The Food and Drug Administration on Wednesday said that Johnson & Johnson’s (NYS:JNJ) single-dose COVID-19 vaccine candidate has no unexpected safety concerns , in a step that moves the experimental vaccine one step closer to emergency authorization.

Read: A new wave of fearless individual investors could be ready to pour $170 billion into stocks, says Deutsche Bank

In other economic data, sales of durable goods rose 1.4% in January, with core capital goods orders advancing 0.5% last month. Separately, an updated reading of U.S. fourth-quarter gross domestic product was raised slightly to 4.1% from 4% from the first estimate.

Meanwhile, the index of pending home sales fell 2.8% in January, after four consecutive months of declines, the National Association of Realtors. The index captures real-estate transactions where a contract was signed, but the sale has not yet closed, making it an indicator of where existing-home sales will go in the months ahead.

Investors were also focused in a renewed surge by shares of GameStop Corp. GME shares, which rose 19% Thursday, building on a gain of more than 100% in the prvious session. The stock had spiked in January amid concerted buying efforts by participants in Reddit’s WallStreetBets forum, sparking a short covering rally that briefly sent ripples through equity markets that attracted scrutiny from regulators and lawmakers.

Read: GameStop Round 2? How an options-buying frenzy is providing another jolt to meme stocks

Which companies were in focus?

  • Shares of movie-theater chain AMC Entertainment Holdings Inc. (NYS:AMC) , another popular stock on WallStreetBets, gained 8.9% in volatile trading.

  • Shares of NVIDIA Corp. (NAS:NVDA) fell 8.2% after the company late Wednesday reported that its quarterly revenue blew past last quarter’s record-setting sales , as high holiday demand for chips used in video games met with supply shortages.

  • Teladoc Health Inc. (NYS:TDOC) shares dropped 13.8% after the virtual healthcare company reported fiscal fourth-quarter results late Wednesday.

  • Verizon Communications Inc. (NYS:VZ) was overwhelmingly the largest bidder in a crucial 5G auction, spending $45.5 billion, or more than half the auction’s total revenues of $81.2 billion, the Federal Communications Commission disclosed Wednesday afternoon. AT&T Inc. (NYS:T) spent 23.4 billion in the C-band auction, while T-Mobile US. Inc. (NAS:TMUS) spent $9.3 billion. Shares of Verizon ended 1.1% lower, those for T-Mobile 2.5% higher and AT&T shares finished 1.3% lower.

  • Shares of Best Buy Co. Inc. (NYS:BBY) closed down 9.3% after earnings and revenues fell short of forecasts.

  • Moderna Inc. (NAS:MRNA) shares rose 2.5% after reporting fourth-quarter results.

How did other markets perform?

  • The ICE U.S. Dollar Index,  DXY a measure of the currency against a basket of six major rivals, was flat.

  • Oil futures jumped to a 13-month high, with the U.S. benchmark  CL.1  gaining 31 cents, or 0.5%, to settle at $63.53 per barrel. April gold futures lost $22.50, or nearly 1.3%, to settle at $1,775.40 an ounce as yields resumed their upward march.

  • In overseas stock trading, the pan-European Stoxx 600  SXXP closed down 0.4% and London’s FTSE 100  UKX fell 0.1%. In Asian trade, the Shanghai Composite  SHCOMP  closed 0.6% higher, China’s CSI 300 (CHINA:XX:000300) rose 0.6%, while Hong Kong’s Hang Seng Index  HSI rose 1.2%.

Link to MarketWatch's Slice.