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Dow drops 320 factors earlier within the week, Nasdaq drops 2% amid tech route

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The big averages saw heavy losses earlier in the week as investors continued to rotate out of technology as bond yields rose.

The Dow Jones Industrial Average fell 323.54 points to 34,002.92, despite strong gains at Merck. The S&P 500 lost 1.3% to 4,300.46. The technology-oriented Nasdaq Composite was the relative underperformer, down 2.1% to 14,255.48.

Big tech stocks like Apple, Nvidia, Amazon, and Microsoft were lower as investors kept an eye on bond yields. A rise in interest rates through late September wiped out highly valued tech stocks. The 10-year government bond yield was slightly higher on Monday, trading around 1.48%. The US 10-year Treasury yield hit 1.56% last week, its highest level since June as investors worried about inflationary pressures and tightened monetary policy.

Social media giant Facebook lost 4.9% after being accused of “betraying democracy” by a whistleblower who revealed their identity on Sunday.

“Financial markets are adjusting leadership to reflect yet another Covid-induced reopening cycle,” said Jim Paulsen, Leuthold Group’s chief investment strategist. “That said, commodities are rising, bond yields are rising, cyclical sectors and small-cap stocks outperform, and technology and growth stocks in general are doing worse.”

On the plus side, Tesla rose 0.8% after the company announced over the weekend that it had shipped 241,300 electric vehicles in the third quarter, well above analyst estimates.

Merck stock was up 2.1% after rising 8% on Friday after the drugmaker said its oral antiviral treatment developed with Ridgeback Biotherapeutics for Covid-19 reduced the risk of hospitalization or death in patients with mild or moderate cases by 50%.

Southwest was up 1.3% after moving Barclays from an equal weight to an overweight. The same analyst upgraded North American Airlines’ sector from neutral to positive.

Energy stocks also rose on a surge in oil prices. Exxon Mobil was up 1.3% and ConocoPhillips was up 2%.

“At these extremely high valuations, stock prices are very sensitive to modest changes in incremental capital flows and it appears that some ‘performance chase’ is underway as the energy sector attracts capital that is trying to make it appear exposure to oil and gas (window dressing) means less money is pouring into the technology, “said Mark Yusko, CEO and chief investment officer of Morgan Creek Capital Management.

Friday was the first day of trading in October and the last quarter of 2021. The top averages rose on that day on promising data for Merck’s oral treatment of Covid-19, which boosted economic reopening-linked stocks.

The market rally followed a tough September plagued by fears of inflation, a Federal Reserve tightening and rising interest rates. The S&P 500 ended the month down 4.8%, breaking a seven month winning streak. The Dow and Nasdaq Composite were down 4.3% and 5.3%, respectively, and had their worst months of the year.

“The recurring nervousness about federal government monetary policy, the disruption in supply chains, and the potential for higher taxes (along with other concerns such as inflation risk and higher taxes) have kept market buzz in check,” wrote John Stoltzfus, chief investment strategist from Oppenheimer Asset Management, in a statement on Monday. “Now, rotation and rebalancing efforts, along with some profit-taking from skeptics, bears and nervous investors, constitute a significant part of market activity on any given day.”

“Oddly, investor concerns about COVID-19 and its variant appear to have played less of a day-to-day ‘worry’ role in the markets lately than it did over the summer,” he added.

The fourth quarter is usually a good period for stocks, but overhangs like central bank tightening, debt ceiling, Chinese developer Evergrande, and Covid-19 could keep investors cautious. At the start of the fourth quarter, more than half of all S&P stocks are down at least 10%.

The S&P 500 averaged 3.9% in the fourth quarter and has risen four out of five years since World War II, according to the CFRA.

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One of the first hurdles markets face in the new quarter is Friday’s closely watched labor report, which could spur the Federal Reserve’s decision to end its bond-buying program.

According to an early consensus figure from FactSet, economists estimate that around 475,000 jobs were created in September. In August only 235,000 employees were added, about 500,000 fewer than expected.

“The markets will probably orientate themselves on the economic data this week if they look for indications of the strength of the US economy in the labor market report on Friday,” said Stoltzfus von Oppenheimer.

– CNBC’s Patti Domm contributed to this report.

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