Wall Street retreated from all-time highs Wednesday as rising Treasury yields and surging oil prices renewed inflation fears. The S&P 500, Dow Jones Industrial Average, and Nasdaq all fell, while long-dated U.S. Treasury bond yields hit multi-decade highs and crude oil briefly topped $100 per barrel.
Yields and Oil Prices Pull Stocks Back
Wall Street pulled back from all-time highs as long-dated US Treasury yields resumed their climb, reviving fears over inflation and mounting debt. The Nasdaq faced its first down day in six, while the S&P 500 and the Dow snapped four-day winning streaks.
Brent crude briefly crept above $100 per barrel amid Iran war-related supply concerns.
“The interest rate/oil combo is going in the wrong direction and that’s causing some weakness in stocks,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. “But keep in mind, this is today’s move is coming off of new all-time highs in the Nasdaq and S&P, so the pullback is not unusual.”
Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana
The Dow Jones Industrial Average fell 324.74 points, or 0.63%, to close at 51,196.54. The S&P 500 lost 20.09 points, or 0.26%, ending at 7,798.84, and the Nasdaq Composite lost 110.81 points, or 0.40%, to finish at 27,489.08. Healthcare stocks led the gainers, while industrials suffered the steepest percentage drop among S&P 500 sectors.
Fed Minutes Show Split Over Rate Hikes
“With regard to the outlook for monetary policy beyond the current meeting, most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end,” the minutes said. “Participants emphasized, however, that they approached each meeting with an open mind and decisions at future meetings would depend on incoming information and its implications for the outlook and the balance of risks.”
Federal Reserve, via meeting minutes reported by Reuters and CNBC
Debt Auction Eases Stock Losses
The Treasury sold $39 billion in 10-year notes in an auction described as solid by market observers. Stocks pared some of their earlier declines after the 10-year Treasury yield backed off its high of the day and crude prices turned lower.
“There’s investor interest at these relatively elevated yield levels compared to what people have become used to in the last 15 to 20 years, but we need to take it with a grain of salt. There are a lot of other drivers out there that we need to take into consideration as well on a standalone basis.”
Bill Merz, head of capital markets research at U.S. Bank Asset Management
Mike Dickson, head of research and quantitative strategies at Horizon Investments, noted that inflation expectations still appear very well anchored despite the climb in yields.
“With the level of rates where they are and the rise that we’ve seen, I think it’s fair to characterize the fact that the margin for error has narrowed as it relates to earnings,” Mike Dickson, head of research and quantitative strategies at Horizon Investments, said to CNBC, before adding that earnings could “still carry the market higher.” He continued, “The level of yields seem very justified, but it doesn’t make them irrelevant.”
Mike Dickson, head of research and quantitative strategies at Horizon Investments
Rising Yields Pressure Mortgage Rates and Stock Prices
The 30-year fixed mortgage rate surged to a near three-year high according to the Mortgage Bankers Association, driven upward by benchmark Treasury yields.
Goldman Sachs and Citigroup shares moved down nearly 2% each, while Bank of America, Wells Fargo, and JPMorgan shed roughly 1% each as investors anticipated that higher interest rates would hinder lending activity.
Technology stocks faced pressure over concerns that elevated borrowing costs could restrict artificial intelligence investments. SpaceX shares fell following reports that the firm was seeking $40 billion in financing.
Financial markets now await the conclusion of the October meeting to see if the Federal Reserve implements a second consecutive rate hike.
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