The Dow Fell 234 Points Because Overextended Value Stocks Tripped

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Equities ended Friday mixed, as value stocks, which have been rallying as of late, took a tumble.

The

Dow Jones Industrial Average

fell 234.33 points, or 0.71%, to close at 32,627.97. The

S&P 500

slipped 2.36 points, or 0.06%, to end at 3,913.10, and the

Nasdaq Composite

rose 99.07 points, or 0.76%, to close at 13,215.24. The biggest gainer in the S&P 500 was logistics giant

FedEx

(ticker: FDX), which saw shares soar 5.6% on a strong earnings report.

The reason the S&P 500 didn’t fall meaningfully was because trillion-dollar giants

Amazon.com

(AMZN) and Google parent

Alphabet

(GOOGL) supported the market-cap-weighted index with respective stock gains of 1.5% and 0.3%. Electric-vehicle behemoth

Tesla

(TSLA), with a market cap of more than $600 billion, saw shares tack on 0.3%.

But the Dow—more weighted toward value stocks—struggled as value fell. Only nine Dow components out of 30 ended the day higher. The

Vanguard S&P 500 Value Index

Fund ETF (VOOV) fell 0.5%. The class of stocks has been on a strong run of late, with the value fund up more than 6% since a broad market sell-off at the end of February.

Bank stocks had a particular rough day, with the

SPDR S&P Bank ETF

(KBE) sliding 1%. Banks have been on an impressively strong run, with the bank fund up 8% since the end of February. The recently outperformance has come with the strong run of the 10-year Treasury yield, which closed Friday at 1.72%, up from 1.5% less than two weeks ago. Inflation and economic-demand expectations are firming as states reopen and trillions of dollars of fiscal stimulus shore up demand.

Conventionally, higher rates on longer-dated bonds are a major positive for bank profitability. But the move higher in interest rates, while ongoing, could easily decelerate; the real yield—yield minus expected inflation—on the 10-year government bond is around negative 0.57%, meaning it loses value against inflation. As the real yield gets closer to positive, the rise in the absolute yield is likely to slow.

“The rise in the 10-year has likely seen an intermediate-term rate of change peak, and since that rise has driven the Financials we expect a relative performance correction,” wrote Tony Dwyer, chief market strategist at Canaccord Genuity, in a note, as he downgraded financials. Simply put, Dwyer is saying that as bond yields rise at a slower pace, bank stocks may not outperform to the same degree in the near future.

Meanwhile, investors bought the dip in growth stocks, which see an outsized dent to their valuations upon higher long-term rates; growth companies expect to see big profits far into the future—often times 10 years out. The

Nasdaq 100,

an index of large-cap growth-oriented technology companies, rose 0.6%. This came even as the 10-year Treasury yield showed strength, rising to as high as 1.74% on the day, before settling back to its closing level.

Next on investors’ radar is consumer and business investment data due next week.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com