The S&P 500 dropped 1.4% to its lowest point in four months. The Dow Jones Industrial Average tumbled 430 points, or 1.3%, and wiped out the last of its gains made for the year so far. Some of the heaviest losses came from Big Tech stocks, which sent the Nasdaq composite to a market-leading loss of 1.9%.
Stocks fell as the pressure on them cranked even higher from rising Treasury yields in the bond market. Such weight has been the main reason the stock market has lost more than 40% of its value since the end of July, after charging higher for much of the year.
The 10-year Treasury yield climbed again Tuesday, up to 4.79% from 4.69% late Monday and from just 0.50% early in the pandemic. It touched its highest level since 2007 and rose after a report showed U.S. employers have many more job openings than expected.
Why is the stock market down today?
When bonds are paying so much more in interest, they pull investment dollars away from stocks and other investments prone to bigger swings in price than bonds. High yields also make borrowing more expensive for companies and households across the economy, which can hurt corporate profits.
What makes bond yields go up?
Yields have been on the march because investors are increasingly taking the Federal Reserve at its word that it will keep its main interest rate high for a long time in order to drive down inflation. The Fed has already yanked its federal funds rate to the highest level since 2001, and it indicated last month it may keep the rate higher in 2024 than it earlier expected.
Fed Gov. Michelle Bowman said in a speech Monday that she expects it will likely be appropriate "to raise rates further and hold them at a restrictive level for some time." Restrictive is what Fed officials call high-enough rates to slow the overall economy.
Tuesday's report on the U.S. job market could give the Fed more reason to keep rates high. It showed employers were advertising 9.6 million job openings at the end of August, much higher than the 8.9 million that economists expected.
Such hunger for workers could keep upward pressure on wages to attract employees. While that would be welcomed by workers trying to keep up with inflation, the Fed's fear is that could give inflation more fuel.
"It's a classic good news is bad news because the potential impact of higher interest rates on both the economy and markets is becoming concerning as the yield on the 10-year Treasury note continues to march higher," said Yung-Yu Ma, chief investment officer at BMO Wealth Management.
The Dow is down 0.4% for the year so far, after being up nearly 8% at the start of August. The S&P 500, which is the index more 401(k) investments are benchmarked against, has sliced its gain for the year so far to 10.2%.
On Tuesday, so-called Big Tech stocks were some of the heaviest weights on the market. They and other high-growth stocks are seen as some of the biggest victims of high interest rates. Amazon fell 3.7%, Microsoft dropped 2.6% and Nvidia lost 2.8%.
Several other challenges are also tugging at Wall Street, besides higher yields. The resumption of student loan repayments could drag on spending by U.S. households, which has been strong enough to help keep the economy out of a recession despite high interest rates. Higher oil prices are threatening to worsen inflation, and economies around the world look shaky.
A weaker recovery than expected in China's economy was one of the main reasons McCormick, a maker of cooking spices, reported slightly weaker revenue for its latest quarter than analysts expected. Its profit matched expectations, but its stock fell 8.5%.
All told, the S&P 500 fell 58.94 points to 4,229.45. The Nasdaq sank 248.31 to 13,059.47, and the Dow dropped 430.97 to 33,002.38.
AP Business Writers Matt Ott and Elaine Kurtenbach contributed.
Stocks fell as the pressure on them cranked even higher from rising Treasury yields in the bond market. Such weight has been the main reason the stock market has lost more than 40% of its value since the end of July, after charging higher for much of the year.
When the yield goes up, government debt begins to look more appealing relative to stocks and concerns increase about the cost of doing business at many operations. The most advantageous way to trade Treasurys is to buy government debt when yields have already presumably reached their peak.
Treasury yields fall for ninth time out of 11 sessions after producer prices unexpectedly drop in May. Thursday's rally in U.S. government debt sent Treasury yields to their lowest levels in more than two months, according to 3 p.m. Eastern time figures from Dow Jones Market Data.
Higher Treasury yields can curb investors' appetite for stocks and other risky assets by tightening financial conditions as they raise the cost of credit for companies and individuals.
A higher interest rate environment can present challenges for the economy, which may slow business activity. This could potentially result in lower revenues and earnings for a corporation, which could be reflected in a lower stock price.
Treasury yields also show how investors assess the economy's prospects. The higher the yields on long-term U.S. Treasuries, the more confidence investors have in the economic outlook. But high long-term yields can also be a sign of rising inflation expectations.
The 10-year yield is currently around 4.5%. It defines the amount 10-year U.S. Treasury notes earn over 10 years if bought today and is a benchmark for a nearly “risk-free” investment.
Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk.
In other words, the higher the demand for treasury bonds, the lower the yield and vice versa. Yields drop when demand is high and rise when demand is low. That's because bonds can be sold on the secondary market, where investors can purchase previously issued financial instruments like bonds.
The 10-year note is undoubtedly a highly significant benchmark for global financial markets. A rising yield indicates investor confidence in the economy but also suggests higher borrowing costs, potentially slowing economic growth. Conversely, a falling yield may signal economic uncertainty.
If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.
Yields on Treasurys, which rise when bond prices fall, largely reflect what investors think the Fed's benchmark short-term rate will average over the life of a bond. They in turn set a floor on mortgage rates and other types of fixed-rate debt.
With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.
The Big Money bulls forecast that the Dow Jones Industrial Average will end 2024 at about 41,231, 9% higher than current levels. Market optimists had a mean forecast of 5461 for the S&P 500 and 17,143 for the Nasdaq Composite —up 9% and 10%, respectively, from where the indexes were trading on May 1.
If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.
Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
Treasury stock is stock that is repurchased by the same corporation that issued it. The corporation is buying back its own stock from the stockholders. Since treasury stock shares are no longer owned by stockholders but by the corporation itself, total stockholders' equity decreases.
When interest rates are rising, both businesses and consumers will cut back on spending.This will cause earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses will increase spending, causing stock prices to rise.
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