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Market Recap: Friday, February 26

Wall Street stocks ended mixed on Friday, with battered technology shares recovering some declines amid encouraging data, though fears of rising interest rates caused investors to take fright. The Nasdaq traded 0.6% higher, paring losses at the end of the week. However, the index still posted a weekly loss of 4.9% for its worst since October as tech stocks unwound some of their steep 2020 gains this week, as benchmark Treasury yields spiked to their highest levels since January 2020. The rise in rates are tied to a range of corporate and consumer borrowing costs, and may undermine the recovery if they jump too quickly. DWS Group Head of Fixed Income, Americas, Greg Staples, and Global Market Strategist at J.P. Morgan Asset Management, Gabriela Santos joined Yahoo Finance Live to discuss.

Video Transcript

SEANA SMITH: We're wrapping up a wild week for stocks, and we're actually looking at some pretty volatile action today. Let's get to Jared Blikre as we count down to the closing bell. Jared.

JARED BLIKRE: Yeah, we're seeing stocks still mixed. Now the S&P 500 has dipped into negative territory once again. You can see the S&P 500 down about 2% for the week, down just 16 basis points for the day. NASDAQ in the green, up 83 basis points.

Russell 2000 right there with it. And just taking another look at the NASDAQ 100, again kind of the reverse of yesterday, but we are well off the highs. Facebook had been up over 3%, and you can see it has been declining into the close, which we have in less than a minute here.

So let's take a look at the sector action for the day and for the week. We can see tech, discretionary, communications services all outperforming. Those are the FANG-heavy sectors there. Energy kind of giving back some weekly gains here. It's down 2%. Over the last five days, though, energy is the only one in the green, still up 4 and 1/2%.

And with the crazy action that we've seen in bonds, you might think that the banking sector has done this-- well this week. And for the most part, it has. JP Morgan, I believe, coming off a record high. It's down slightly. Bank of America up about half a percent.

But some of the biggest winners and losers have been in the bond market. And I think we're going to get some great commentary from our guests on that in a few seconds. And here is the closing bell on Wall Street.

[MUSIC PLAYING]

[GAVEL BANGING]

SEANA SMITH: And that closes out the trading week. Taking a look at our final numbers here as the final trades shake out, the Dow closing off 475 points, some additional selling here into the close. We were up just over 300 points just a couple of minutes until the closing bell. S&P off just around a half of a percent.

NASDAQ well off the highs of the day, closing up just around a half of a percent. The 10-year yield up for five weeks in a row. The Dow, with the losses today, snapping a three-week winning streak. The NASDAQ reporting its worst week since October.

Jared was just running through the sector action. But just to recap, energy, because energy off 2% today, but for the week, like Jared was saying, up 4%, the only sector in the green for the week. We want to bring in our market panel. We're joined by Greg Staples, he's the Head of Fixed Income at DWS Group, and Gabriela Santos, Global Market Strategist with JP Morgan Asset Management.

Gabriela, let me go to you first. We have these wild swings in the market this week, what Jared was just talking about. We saw the 10-year yields spike to a level that we haven't seen in more than a year. Help us make sense of the action that we saw in the markets this week and really what this means for equities going forward.

GABRIELA SANTOS: Sure. So it's really all about the move in Treasury yields, so another move higher this week to cap quite a move higher in February, as a whole, of close to 40 basis points for the 10-year. We think up until yesterday the majority of this move in bond yields was really for good reasons for higher nominal growth expectations, a surge in yield to reflect a surge in vaccinations and in economic activity up here in-- over the next few months. And for a while, that was really very supportive for your more cyclical areas of the market, like energy and financials.

Yesterday was different. It was much more driven by a pulling forward of Fed rate hike expectations, by poor liquidity. That one was not so well-absorbed by the market. That's why we had just a big generalized sell-off yesterday. Overall, we think rates should calm down, and this should continue to be supportive for risk assets like equities. And we want to be balanced between your more cyclical as well as your more growth side, a 50-50 balance makes sense.

ADAM SHAPIRO: All right, well, Greg, picking up on what Gabriela said, you know, you've pointed out we may be looking at a, quote, "liberation spring." I think we all cheer that, especially with the fatigue of COVID pandemic lockdown. But I'm curious, with the money coming out of bonds, and the money today and yesterday coming out of equities, where is it going? Is it really just sitting in cash doing nothing?

GREG STAPLES: Well, longer term, it's going to be tough to do that because, as we all know, cash is earning virtually zero. In fact, that's sort of a side story of the market that money market funds are actually earning one to two basis points. That's what T-bills are earning right now.

And they have to credit one basis point. If they had their druthers, they'd actually credit negative to some shareholders, but I think the market won't accept that. So they're pinched. Yeah, but for the moment at least, we think the money's going into cash.

But to pick up on what Gabriela was saying just a minute ago, it's a very interesting time in the marketplace. We've got a confluence of three different things. One is absolutely superb numbers on COVID. Just think, six weeks ago, we were seeing 250,000 new cases a day. Now we're in the 50s and 60s. Remarkable, and we think it's going to go down even more from here.

Number two is the economic data is really strong. We had third quarter at 30-plus percent GDP growth, fourth quarter at 4%, and we're running close to 9% right now, if you think about the Atlanta Fed's GDPNow numbers. And then the last is really the stimulus coming through. I think up until about oh, two or three weeks ago we were talking about a $1 trillion stimulus.

Now it looks like the House is going forward with $1.9, and who knows, they might get that through the Senate. You put those three together, you're talking about the potential for real overheating in the second quarter. And I think that's giving fixed income investors some real pause here.

SEANA SMITH: Gabriela, how have you changed your strategy at all as a result of the higher yields, I mean, just in terms of what we were expecting going back a couple of weeks ago to what we're seeing play out today?

GABRIELA SANTOS: No, our messages are still generally the same. Coming into this year, we were expecting a surge in activity during this year of the vaccine. If anything, we have more upside risk now. So the strategy was really to add cyclicality to portfolio, so a balance between value and growth within the style bucket in the US, as well as an overweight to international markets versus the US. International markets a lot more cyclical than our markets. That message very much remains the same.

On the bond side, our message was also to be careful with the potential for rising yields, which is now playing out. And as a result, our strategy in fixed income is to bring down duration and to focus in parts of the corporate credit market that can absorb better the move higher in yields and the improving backdrop, which tends to be a riskier part of fixed income, like high-yield and asset-backed securities.

ADAM SHAPIRO: Well, Greg, part of the fear too, playing upon what Gabriela just said, is inflation and that the US may lose control of its fiscal policy. Is that playing out yet in what we're witnessing in these markets?

GREG STAPLES: I think so. I mean, it's interesting, you can tell what market expectations are for inflation by looking at the TIPS market. That's actually stabilized over the past week or so. Most of the recent activity has been what's called real rates, and it's the other component of the TIPS markets. And we think inflation is probably going to be under control, unless-- unless fiscal spending gets a little bit crazy.

I think it's really more a question about once we get past this current stimulus plan of maybe $1.9 trillion, then right behind it, potentially, is another $2 to $4 trillion of infrastructure. And you put those on top of the existing stimulus, I think international investors are getting a little bit worried that the United States might be losing control of its fiscal purse strings, if you will, a little bit too much.

SEANA SMITH: Jared, we want to go back to you for your final thought here as we wrap up what has been a very crazy week, especially what we saw play out in the bond market. The big question is, is the worst in terms of some of the selling pressure that we saw in equities this week, do you think the worst is over?

JARED BLIKRE: Fingers crossed. Let's take a look at the charts here. We got the S&P 500 just resting on the 50-day moving average here. And we're only down about 4% from these highs. In the NASDAQ, we're talking about 6% from highs. And you put it all together, this is kind of the market in which we live right now, that everything gets priced in at once and very quickly, almost immediately.

We saw this back in November around the election. We certainly saw this last February and March around the initial COVID sell-off. But we really haven't seen equities take much of a dip here. We still have tremendous tailwinds that we've just been talking about from the fiscal side, from the monetary side. Even if the bond market is pricing in a Fed that's going to be tapering a little bit sooner than later, I do believe that the equity markets have sold off enough to kind of justify the movements that we've seen in the bond market.

But it's going to be critical to see what exactly happens next week. And we're got-- we've got a full economic calendar, and any more extremely hot data is going to be priced into the bond market. We'll have to see what the reactions are there. But for now, maybe we can all breathe a sigh of relief heading into the weekend. Guys.

SEANA SMITH: All right, Jared Blikre, thanks so much. And of course, our thanks to Gabriela Santos, Global Market Strategist with JP Morgan Asset Management, and Greg Staples, Head of Fixed Income at DWS Group.