Rally picks up steam as market shakes off rate fears, Dow climbs 650 points

U.S. stocks rose sharply on Monday, as Treasury yields retreated from their last week’s highs, easing concerns about inflation and that higher rates would undermine equity valuations.

The Dow Jones Industrial Average jumped 660 points, or 2.2%, led by Boeing which climbed 6.8%. The S&P 500 gained about 2% as all 11 sectors traded in the green. The Nasdaq Composite, the tech heavy index that got hit hard last week, popped 1.9%.

The 10-year Treasury yield dipped to 1.43% on Monday, off by 3 basis points from Friday and down from its recent high of 1.6% on Thursday. The sudden spike in the benchmark yield rattled stocks last week as rising rates can threaten the relative appeal of equities and compress stock valuation by reducing the value of future cash flows.

Market breadth was strong on Monday with only about 8 stocks trading lower in the whole S&P 500. On the NYSE, 11 stocks advanced for every one that declined. Economic reopening plays like Carnival and American Airlines were higher by at least 3% amid optimism on vaccines and economic reopening. Meanwhile, high-growth tech shares outperformed as rates fell. Apple and Tesla both rose 3%.

“Equity investors are still looking at the rise in rates mostly as ‘a good thing’ and not yet as a threat notwithstanding some shaking of the tree in high multiple stocks and other parts of the market last week,” Peter Boockvar, chief investment officer at Bleakley Advisory Group. “The benefits of the vaccines vs the challenge of higher rates will be the theme this year.”

Boosting sentiment on the vaccine front, the Centers for Disease Control and Prevention advisory panel voted unanimously Sunday to recommend the use of Johnson & Johnson‘s one-shot Covid-19 vaccine for people 18 years of age and older. The company expects to ship out four millions of doses initially.

Last week, the blue-chip Dow and S&P 500 lost and 1.7% and 2.5%, respectively. The technology-heavy Nasdaq dropped more than 4% during the same period, after suffering its worst one-day sell-off since October on Thursday. Technology companies rely on being able to borrow money for a low rate in order to invest in future growth.

“The outsized rotation suggests there could be some tactical reversal if yields settle down,” Keith Parker, equity strategist at UBS, said in a note. “Earnings should more than offset rate headwinds through the course of the year albeit with pockets of downdrafts in that uptrend.”

The House passed a $1.9 trillion Covid relief bill, the American Rescue Plan Act of 2021, early Saturday. The Senate will now consider the legislation. 

The major averages rose for the month of February, bolstered by a strong earnings season, positive news on the vaccine rollout and hopes of anther stimulus package.

The Dow gained 3.15% for its third positive month in four in February. The S&P 500 gained 2.61% and the Nasdaq Composite gained nearly 1% for its fourth positive month in a row.

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