Dow skids more than 500 points lower as rising bond yields spark equity selloff

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U.S. equity benchmarks were sharply lower Tuesday afternoon, as Treasury yields extended their climb, putting pressure on the technology sector and growth-oriented shares.

How are stocks trading?

  • The Dow Jones Industrial Average fell 500 points, or 1.4%, to 34,369.
  • The S&P 500 was down 80 points, or 1.8%, at 4,364.
  • The Nasdaq Composite dropped 374 points, or 2.5%, to 14,596.

On Monday, the Dow Jones Industrial Average rose 71 points, or 0.2%, while the S&P 500 declined 0.3% and the tech-heavy Nasdaq Composite dropped 0.5%.

What’s the driving market?

Stocks sold off as investors anticipate the Federal Reserve moving away from the accommodative policy it set during the early months of the pandemic amid concerns over elevated inflation.

“Investor anxiety is pretty elevated right now,” said Seema Shah, chief strategist with Principal Global Investors, in a phone interview Tuesday. “There’s a lot going on.”

The CBOE Volatility Index was trading around 22 Tuesday afternoon, up about 33% this month, according to FactSet data, at last check.

Investors have been shunning government bonds since last week’s Federal Open Market Committee meeting, as traders brought forward expectations for the first interest-rate increase into late 2022. Markets are also giving roughly 50% odds the European Central Bank will join the Fed with a rate increase next year.

The 10-year Treasury yield was up about 6 basis points at 1.54% Tuesday afternoon, after hitting its highest level since June.

Rising long-term bond yields have put pressure on tech- and other growth-related shares, while stocks for companies more sensitive to the economic cycle were also succumbing to selling pressure, but outperformed more rate-sensitive stocks.

“Bottom line, the stock market is being driven by the bond market this week and if we see bonds continue to drop (yields spike higher) then that will result in further underperformance by growth stocks and drag the broader market lower while stabilization in yields would likely allow for a rebound,” said Tom Essaye, founder and president of Sevens Report Research, in a Tuesday note.

The speculation about rising interest rates next year is helping the U.S. dollar gain ground, as the dollar index is now just 1% below its 52-week intraday high.

Fed Chair Jerome Powell was speaking on Tuesday in front of the Senate Banking Committee with U.S. Treasury Secretary Janet Yellen on the government’s response to the coronavirus pandemic, and is due on Wednesday to speak at an ECB event.

Powell said some of the supply bottlenecks at the heart of a spike in inflation have worsened. According to Shah, some investors worry that persistently high elevation will destroy demand and put the Fed into a difficult position of tightening monetary policy into a weakening economy. Shah said that she expects inflation will stay elevated well into 2022 and then start to fade.

“Powell would have to make some very strong arguments now to stop the current rise in yields,” said Mark Grant, chief global strategist at B. Riley Financial. “The 10 year Treasury has now broken through its technical resistance and things could get problematical.”

Grant said investors should be selling bonds, and using yield-paying exchange-traded and closed-end funds as income substitutes.

U.S. Treasury Secretary, Janet Yellen, meanwhile, warned that the Treasury Department is likely to exhaust extraordinary measures to keep from defaulting on its debt if Congress hasn’t acted to raise or suspend the debt limit by Oct. 18.

Read: What happens if the U.S. defaults on its debt?

Energy markets are another source of concern, as Europe and Asia fight for natural-gas supplies. The lead natural-gas contract has surged more than 130% this year.

With consumers facing higher oil prices as the cost of living rises in the pandemic, Shah said there are signs inflation is weighing on spending and sentiment.

In U.S. economic data, the Conference Board said its index of consumer confidence slid to a seven-month low of 109.3 this month from a revised 115.2 in August.

The U.S. trade deficit in goods rose 0.9% in August to $87.6 billion. And the S&P Case-Shiller 20-city home-price index rose 19.9% in the year to July.

See: Home prices rise at record pace for 4th consecutive month, but economists aren’t worried about the housing market — yet

“We’re in that time period right now where we’re focusing more on the macro headlines because we’re still about two weeks away from earnings season,” said Larry Adam, chief investment officer at Raymond James, in a phone interview Tuesday. That creates some volatility, he said.

As companies start reporting results for the third quarter, investors will get a “bottom up” view of what “CEOs and CFOs are really seeing in the marketplace,” said Adams, who is expecting that earnings will be “very solid.”

Which companies are in focus?

  • Shares of Ford Motor Co. were up 1.5% after the auto maker announced plans to spend $11.4 billion to build “mega-campuses” in Tennessee and Kentucky, to help supply new manufacturing capacity for electric vehicles.
  • Thor Industries Inc. topped Wall Street expectations for its fiscal fourth-quarter profit, showing a year-over-year sales gain as demand for recreational vehicles remained strong. Shares rose 7.5%.
  • Shares of Aurora Cannabis Inc. shook off premarket losses, rising 8% after the Canadian company late Monday said sales continued to decline while losses mounted in the final three months of its fiscal year.
  • The Wall Street Journal reported that Merck & Co. Inc. was in talks to acquire Acceleron Pharma Inc. which has a market value of around $11 billion. The report said a deal could be announced this week if the talks don’t fall apart. Acceleron shares climbed 3.7%, while Merck shares edged up 0.4%.

How are other assets trading?

  • The ICE U.S. Dollar Index a measure of the currency against a basket of six major rivals, was up 0.4%.
  • Oil futures pulled back from an earlier jump, with the U.S. benchmark settling 0.2% lower at $75.29 a barrel. Gold futures fell 0.8% to settle at $1,737.50 an ounce.
  • In European equities, the Stoxx Europe 600 closed 2.2% lower, while London’s FTSE 100 shed 0.5%.
  • In Asia, the Shanghai Composite rose 0.5%, while the Hang Seng Index rose 1.2% in Hong Kong. Japan’s Nikkei 225 fell 0.2%.

—Steve Goldstein contributed to this report

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