The Nasdaq Bounced. The Dow Dropped—Again. It’s More Fallout From the Fed.

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Wall Street was rocked Wednesday by meeting minutes from the Fed’s monetary policy body.

Angela Weiss/AFP via Getty Images

Technology stocks bounced late Thursday after soaring bond yields hit them earlier in the session.

The Federal Reserve is signaling it will raise rates more dramatically because of inflation concerns, which has sent jitters through a market priced to perfection.

The Dow Jones Industrial Average dropped 171 points, or 0.5%, after the index dropped 392 points, or more than 1%, Wednesday. The S&P 500 dipped 0.1%, while the technology-heavy Nasdaq Composite fell 0.1%, erasing most of its earlier losses. The index had dropped more than 1% earlier in the session.

Friday, the spotlight will fall on the December jobs report, with expectations for 422,000 jobs to have been added. Markets want to see that people are getting back to work at a brisk pace, but not so fast that the Fed becomes even more likely to tighten monetary policy quickly.

Tech shares thrive in a low-interest rate environment because so much of their profits are way out in future. As long-dated bond yields rise, investors place bigger discounts on future cash flows.

The 10-year Treasury yield rose Thursday to as high as 1.75%, but ended the day just below that level, after closing Friday at 1.51%. Thursday’s rise comes a day after the Federal Reserve made clear that it will soon lift interest rates. The yield’s highest level of the day was also level is its pandemic-era high, last achieved in March of 2021. 

The central bank indicated in its December minutes, published Wednesday, that it will likely raises rates several times this year, starting in the next few months. The Fed is trying to fight recently high inflation, which seems to be sticking around. 

The Fed minutes also revealed that it is considering shrinking its balance sheet. For now, the Fed is buying a lesser amount in bonds each month, but when it reduces its balance sheet, it will sell bonds. That could help bring bond prices down, lifting their yields. The bond market seems to be preparing for that. 

And that’s much of what the stock market has been reacting to. “The real change was in the [Fed] language related to the balance sheet runoff,” wrote Michael Reinking, senior market strategist at New York Stock Exchange.

That meant more pain for technology stocks. The Nasdaq has fallen about 6% below its all-time high, hit in late November.

But buyers stepped in to keep the price of tech stocks afloat by late morning.

One reason: The 10-year yield’s pause just under its pandemic-era high signifies that it may not yet be ready to shoot ever higher, market watchers said. “There’s resistance in the 1.75% area,” said John Kolovos, chief technical strategist at Macro Risk Advisors.

That means there’s a limit to how far tech stocks can keep falling — for the moment. “With the Nasdaq, the expectation is to see a bounce” after falling as much as it has, Kolovos said.

Bitcoin and other cryptocurrencies continued to feel the pressure—but stabilized—after the leading digital asset sold off after the Fed minutes were released. Bitcoin was down as much as 9% before the losses moderated to 0.4% to $43,210, according to price data from CoinDesk. Ether fell 13% before that loss moderated to 3.2%. Cryptocurrencies are essentially long-term bets, which speculate that the currencies will have some measurable value far into the future, making their prices sensitive to changes in long-dated bond yields. So with yields pausing, it isn’t surprising to see cryptos’ losses pause, too.

The Dow, home to more economically-sensitive stocks, has fallen in recent days, but not as much as the Nasdaq has. The index is down just over 1% from its high, hit in the new year. Rate hikes could put a dent into economic growth.

Growth stocks may continue to see volatility as long as the markets remain uncertain about the Fed’s future plans. The Fed’s shift may “hurt growth [stocks] more than cyclical and defensive sectors,” wrote Tom Essaye, founder of Sevens Report Research. 

For the next several months, as the Fed communicates its policy changes, markets may be volatile. “The hawkish FOMC minutes from the December meeting suggest that investors should be prepared for more volatility in 2022 across many different asset classes including stocks, bonds and interest rates,” wrote Nancy Davis, founder of Quadratic Capital Management.

The price of WTI crude oil rose more than 2% to over $79 a barrel. That sent the Energy Select Sector SPDR Exchange-Traded Fund (XLE) up 2.2%.

Overseas markets were closed before the minutes were released, so the response of traders in Europe and Asia was delayed until Thursday. Tokyo’s Nikkei 225, which analysts say has been closely correlated with the Nasdaq, dropped 2.9%. The pan-European Stoxx 600 was 1.3% lower.

On Thursday, U.S. data showed weekly jobless claims rose to 207,000, higher than the expected 195,000 and worse than last week’s result of 200,000. 

Still, other economic data will be more influential over market expectations on Fed policy. “The slight increase in jobless claims is unlikely to rock the boat—inflation is center stage when it comes to the Fed’s potential moves,” wrote Mike Loewengart, managing director of investment strategy at ETrade. 

The consumer-price index is set to be released on Jan. 12. 

Here are seven stocks on the move Thursday:

Crypto exchange Coinbase (ticker: COIN) fell 0.1% after a 6.4% fall Wednesday. It and other stocks linked to cryptocurrencies had felt the heat from a slide in digital asset prices before recovering some of the losses. Marathon Digital (MARA) fell 1.1%, with Riot Blockchain (RIOT) slipping, 4.5%; both stocks fell 12% to 13% Wednesday. MicroStrategy (MSTR) dropped 2.1%, also recovering from heavier losses earlier.

Walgreens Boots Alliance (WBA) stock initially rose, then fell 2.9% after the company reported a profit of $1.68 a share, beating estimates of $1.36 a share, on sales of $33.9 billion, above expectations for $32.9 billion. The company also raised its guidance

Texas Roadhouse (TXRH) stock gained 0.7% after getting upgraded to Buy from Neutral at UBS. 

Target (TGT) stock fell, then rose 1% after getting downgraded to Equal Weight from Overweight at Wells Fargo. 

Write to Jack Denton at jack.denton@dowjones.com and Jacob Sonenshine at jacob.sonenshine@barrons.com