By Michael Wursthorn
Tech stocks bounced back from their worst open in months Tuesday, after prepared testimony from Federal Reserve Chairman Jerome Powell cooled the rate fears that have fueled a late February rout.
Many major stocks were down, but only modestly so. Tesla Inc. had fallen 5% after dropping as much as 12% in early trading, while the Nasdaq Composite Index was down 1.9% after an early decline of 4% put it on track for its worst day since September. The index is down about 6% from its peak Feb. 12, as rising U.S. interest rates prompt a broad re-evaluation of investor growth expectations, and on track for a sixth straight decline -- its longest pullback in a year.
Tesla, whose 743% surge last year highlighted the tech-led market rebound from the coronavirus selloff, is now down for 2021 and has lost a quarter of its value since the electric-car firm said Feb. 8 that it had spent $1.5 billion on bitcoin in a bid to boost returns on cash.
Other investor favorites were also recovering after being hit hard in early trading. Moderna Inc., the biotech maker of a major Covid vaccine, was down 8% after falling as much as 13%. Apple dropped 2.8% and Amazon.com Inc. fell 1.5%.
The tech firms have emerged as a favorite of the small investors who have piled into stock and options trading over the past year, with Nasdaq rising 44% in 2020. But the scale of the rally has prompted concerns that many of the stocks are overvalued, making them vulnerable to sudden slumps.
The rise in U.S. interest rates over the past week to a recent 1.37% on the 10-year Treasury note signifies expectations of faster economic growth, which investors said reduces the relative attractiveness of the tech firms compared with more economically sensitive and less highly valued investments such as banks and manufacturing firms.
"We're seeing a nasty, violent rotation," said Mike Bailey, director of research at FBB Capital Partners, an investment manager in Bethesda, Md. "A lot of the stratosphere stocks are getting dragged down."
The pullback comes on the heels of dozens of record closes for major indexes in recent months. The Dow hit a recent record on Feb. 17 and the S&P 500 on Feb. 12. Investors said the gains in stock indexes was driven in part by the notion that with U.S. interest rates near all-time lows, there was no alternative to investing in shares -- a concept that came to be known by the acronym TINA.
The modest rise in U.S. rates this year hasn't made borrowing substantially more costly or notably increased the appeal of bonds, but it has reminded investors of the risks of holding investments.
Stocks retraced some declines later Tuesday after Mr. Powell signaled in prepared testimony before Congress that despite signs of recovery since the Covid pandemic began, "the economy is a long way from our employment and inflation goals." The comment was taken by investors as a sign that any Fed interest-rate increases are "still several years away," said Paul Ashworth of Capital Economics.
Even so, many investors remain circumspect for the moment. Mr. Bailey of FBB Capital said his firm has been cautious on stocks, with major indexes near records and bond yields ticking up. FBB has been buying corporate bonds as one play on the changing environment, he said.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires