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U.S. stocks suffer another week of losses, Dow ends lowest since November 2020 as bond yields hammer equities after Fed rate hike

US stocks closed sharply lower on Friday, with the Dow Jones Industrial Average ending at its lowest closing value since November 2020. All three major benchmarks suffered another week of losses as bond yields rose in the wake of the Federal Reserve’s rate hike on Wednesday.

According to Dow Jones Market Data, the Dow fell 4% this week, while the S&P 500 fell 4.6% and the Nasdaq fell 5.1%. All three major indices fell for the second week in a row.

What drove markets

US stocks fell sharply on Friday as market volatility mounted in the wake of the Federal Reserve, which delivered a third consecutive three-quarter percentage point jumbo rate hike on Wednesday.

“Recession risks have increased and no one wants to be the last to squeeze through the door,” Russell Evans, managing principal and chief investment officer at Avitas Wealth Management, said in a telephone interview on Friday. “The market is rushing to anticipate what the market sees as inevitable.”

Investors are concerned that the prospect of a so-called soft landing for the US economy is fading as the central bank continues its aggressive pace of tightening monetary policy in an effort to combat high inflation. After announcing his latest major rate hike on Wednesday, Fed Chair Jerome Powell again warned that his work is not done.

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“People interpreted this week’s action and rhetoric as more aggressive,” Evans said.

The S&P 500 ended Friday 0.7% higher than its 2022 low of 3666.77 on June 16, while the Dow hit a new low this year by finishing at its lowest closing since Nov. 20, 2020, according to Dow Jones Market Data. .

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Treasury yields have risen since the Fed’s policy decision was announced Wednesday, putting pressure on the stock market.

The return on the 10-year Treasury TMUBMUSD10Y,
3,687%
fell one basis point Friday to end at 3.695%, after rising Thursday to its highest level since February 2011, based on 3:00 p.m. Eastern Time, according to Dow Jones Market Data.

Meanwhile, the 2-year Treasury yield TMUBMUSD02Y,
4.211%
climbed 8.8 basis points to 4.212% on Friday, to the highest level since October 12, 2007.

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“The price action has been very, very chaotic all week, and I believe mainly driven by the bond market,” said Mike Antonelli, a market strategist at Baird.

But it’s not just the Fed that is scaring the markets. A host of other global central banks also raised interest rates this week. US stock traders are paying particular attention to the UK, where markets have been rocked by the Bank of England’s latest surge.

To see: Bond yields spike, pound plunges to 37-year low as UK unveils deficit-funded tax cuts worrying investors

“We have new tax cuts in the UK, which could trigger even more rate hikes from the Bank of England,” Jeff Kleintop, chief global investment strategist at Charles Schwab, said in a telephone interview Friday.

“The tax cuts in the UK are likely to pump more money into the economy, which is likely to lead to increased demand and further fuel inflation,” Kleintop said. That, in turn, could lead to the Bank of England raising interest rates even further at a time when investors worry that monetary policy tightening by central banks increases the risk of a global recession, he said.

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One of the biggest challenges the markets are currently facing is the rise in real interest rates, that is, government bond yields minus the break-even inflation rate of inflation-protected bonds. Real interest rates have risen sharply in the past six weeks as investors reacted to, among other things, data that showed surprisingly strong inflation in August.

“Because of the discounting effect, higher real rates lower the risk premium for equities, which is the major challenge for the market,” said Brad Conger, deputy chief investment officer at Hirtle, Callaghan & Co.

If there’s any bright spot for the markets right now, it’s that stocks and bonds seem a little oversold here, as much of the bad news — including a terminal rate for fed funds north of 4.5% — has already been priced in, Conger said. . “If there’s marginal good news…it can shoot us higher,” he added.

Turning to economic data, readings from the flash S&P Global US purchasing managers’ indices for both manufacturing and services helped push the composite PMI to 49.3 in September, ahead of the FactSet consensus figure.

It’s still a “soft reading,” Charles Schwab’s Kleintop said. “It would still point to the risk of a mild GDP contraction in the third quarter.”

The energy sector SP500.10,
-6.75%
was hardest-hit by sectors of the S&P 500 in Friday’s slump, falling about 6.75% as US oil prices fell below $80 a barrel, according to FactSet data. Consumer cyclical SP500.25,
-2.29%
shares were also badly bruised, falling 2.3%.

Meanwhile, the market is “very likely to see downward guidance” into the coming third-quarter earnings season after seeing resilience in corporate earnings growth this year, Kleintop said. “That could be one last support for the market that could start to deteriorate,” he warned.

Evans of Avitas Wealth Management says he’s been looking for buying opportunities in the stock market carnage lately. “I’ve added some technology stocks, but very large established technology stocks,” he said.

Companies in the picture
  • Costco Wholesale Corp.
    COST,
    -4.26%
    shares fell 4.3% after delivering Q4 results late Thursday. The wholesaler said it saw higher freight and labor costs and reported operating margins slightly below consensus expectations.

  • Shares of Chevron Corp. CVX,
    -6.53%
    tumbled 6.5% and boeing co.
    BA,
    -5.37%
    fell 5.4%, pushing the Dow down as two of the worst performers in the index Friday.

  • FedEx Corp.
    FDX,
    -3.37%
    shares fell 3.4% after the company announced cost cuts and increases in shipping costs a week after withdrawing its outlook, pushing its shares down and even hurting stocks in general.

—Steve Goldstein contributed to this report.

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