by Rising Treasury yields appeared to finally catch up to a previously robust stock market, leaving the Dow Jones Industrial Average and other major indexes with their worst day so far in 2023.
“Interest rates are popping above the curve … This time, market rates appear to be keeping up with fed funds,” veteran technical analyst Mark Arbeter, president of Arbeter Investments, said in a note. Typically, market rates tend to lead the way, he observed.
Since the start of the month, traders in fed-fund futures have priced in a more aggressive Federal Reserve after initially doubting the central bank would meet its forecast for a peak fed-fund rate above 5%. A few traders are now even pricing the outside possibility of a top rate close to 6%.
The return on the 2-year government bond
TMUBMUSD02Y
jumped 10.8 basis points to 4.729%, the highest close in a US session since July 24, 2007. The 10-year Treasury yield
TMUBMUSD10Y
climbed 12.6 basis points to 3.953%, the highest since November 9.
“At this point, the bond market has all but abandoned optimistic expectations of limited further hikes and a series of rate cuts in the back half of 2023,” Daniel Berkowitz, chief investment officer of Prudent Management Associates, said in an emailed statement.
Meanwhile, the US dollar has also rallied, with the ICE US Dollar Index adding 0.2% to a February setback. Arbeter also noted that breadth indicators, a measure of how many stocks are participating in a rally, had previously deteriorated, with some measures reaching oversold levels.
“Just another perfect storm against the stock markets in the short term,” Arbeter wrote.
Rising returns can be negative for shares, and increase borrowing costs. More importantly, higher government interest rates mean that the present value of future profits and cash flows is discounted more strongly. It can weigh heavily on technology and other so-called growth stocks whose valuation is based on earnings far into the future. These stocks were battered last year, but have led the way in an early 2023 rally, and remained resilient through last week even as yields increased.
Interest rates have been on the rise following a series of warmer-than-expected economic data, which has increased expectations for Fed rate hikes.
Meanwhile, weak guidance Tuesday from Home Depot Inc.
HD
and Walmart Inc.
WMT
also contributed to the weak brush tone.
Home Depot fell more than 7%, making it the biggest loser among the components of the Dow Jones Industrial Average
DJIA
.
The decline came after the home improvement retailer reported a surprise drop in fiscal fourth-quarter same-store sales, led to a surprise drop in fiscal 2023 profit and earmarked an additional $1 billion to pay its employees more.
“While Wall Street expects resilient consumers after last week’s robust retail sales report, Home Depot and Walmart are much more cautious,” Jose Torres, senior economist at Interactive Brokers, said in a note.
“This morning’s data provides more mixed signals regarding consumer demand, but during a traditionally weak seasonal trading period, investors are shifting to a glass-half-empty perspective against the backdrop of a year characterized by the exact opposite so far, a glass-half-full perspective,” wrote he.
The Dow fell 697.10 points, or 2.1%, to close at 33,129.59, while the S&P 500
SPX
fell 2% to close at 3,997.34, finishing below the 4,000 level for the first time since January 20. The fall cut the S&P 500’s year-to-date gain to 4.1%, according to FactSet, which is less than half the 9% year-to-date gain it had enjoyed at its Feb. 2 peak.
Nasdaq Composite
COMP
fell 2.5%, reducing the annual gain to 9.8%. The losses meant that the Dow was marginally negative for the year, down 0.5%. It was the worst day for all three major indexes since Dec. 15, according to Dow Jones Market Data.
Arbeter identified a “very interesting cluster” of support just below Tuesday’s low for the S&P 500, with the convergence of a pair of trend lines along with the index’s 50- and 200-day moving averages all near 3,970 (see chart below).
“If that zone doesn’t represent the pullback lows, we have more problems ahead,” he wrote.
