Rising Bond Yields, Interest-Rate Worries Drag Stocks Lower
The highest bond yields in more than a decade prompted another stock-market selloff Thursday, as the possibility of a prolonged higher interest-rate environment sank in across Wall Street.
The $S&P 500(.SPX)$
A selloff in government bonds, prompted by surprisingly strong economic data, sent yields higher. The yield on the 30-year Treasury bond rose to 4.55%, the highest level since 2011 and its largest one-day increase since June 2022. The 10-year Treasury yield settled at 4.479%, the highest since 2007. The two-year yield rose to 5.148%, its highest reading since 2006.
Stocks have rallied in 2023 after a sharp selloff last year, pushed higher by investor hopes that the Fed will end its campaign to raise interest rates and buoyed by enthusiasm for artificial-intelligence technology.
But the mood on Wall Street has darkened of late. The Nasdaq is down 3.5% since Friday, on pace for its worst weekly performance since March 10. The Dow, S&P 500 and Nasdaq are all facing consecutive monthly declines for the first time since last September.
The Federal Reserve opted to hold interest rates steady on Wednesday, as investors expected. But central-bank officials also signaled they expect to keep rates higher further into 2024. In their projections and commentary, some officials have hinted that the so-called neutral rate, or the rate needed to keep inflation and unemployment levels stable over time, might be higher on a longer-term basis.
The central bank is aiming to engineer a so-called soft landing, cooling the economy enough to bring inflation to heel without conjuring a recession.
Recent economic data suggest that those goals haven't yet been reached. Initial jobless claims fell to 201,000 in the week ended Sept. 16, the Labor Department said Thursday. That was below the consensus estimate of 225,000, according to FactSet, a sign of a still-strong job market.
Meanwhile, higher gas prices are threatening to push inflation higher. Crude-oil futures fell slightly to settle at $89.63 a barrel, but have gained 7.2% so far in September.
Investors warned that the economy might not hold up in a prolonged period of higher rates, a sentiment that is fueling stock-market pessimism. "I find it difficult to believe we will go through a period of below-trend economic growth with corporate earnings still rising, while avoiding an increase in unemployment," said Liz Young, head of investment strategy at SoFi.
Young said she is looking for buying opportunities in defensive sectors like healthcare, utilities and energy, while avoiding stocks that depend on strong consumer spending. Consumer-discretionary stocks within the broad index fell 2.9% on Thursday.
Some investors said higher interest rates are leading individuals to select more conservative securities, even as attractive returns are available for relatively little risk in the bond market. "It's really hard to get people out of cash right now when it's paying 5.2% on the short end," said Andrew Grant, director of manager research and investment solutions at Kayne Anderson Rudnick.
Shares of $FedEx(FDX)$ rose 4.5% Thursday after reporting earnings, the S&P 500's top performer. Shares of $Cisco(CSCO)$ fell 3.9% after the network-equipment provider said it plans to buy cybersecurity firm Splunk for $28 billion. $Splunk(SPLK)$ shares advanced 21%.
Shares of British chip designer $Arm Holdings(ARM.US)$ slipped below their IPO price of $51 in midday trading, before closing at $52.16.
The average rate on the standard 30-year fixed mortgage edged up to 7.19% from 7.18% a week earlier, according to a survey of lenders released Thursday by mortgage-finance giant $FREDDIE MAC(FMCC.US)$. That marked the sixth consecutive week rates have held above 7%.
Homebuilder shares fell. $KB Home(KBH.US)$ lost 4.3% after reporting earnings, while $PulteGroup(PHM.US)$ and $D.R. Horton(DHI.US)$ declined 3.3% and 3.7%, respectively.
In overseas markets , Hong Kong's Hang Seng Index and Japan's Nikkei 225 both retreated more than 1%. The Stoxx Europe 600 also lost around 1% as shares retreated across the continent.
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