A surge in Treasury yields on Tuesday appeared to finally catch a previously resilient stock market, leaving the Dow Jones Industrial Average and other major indexes with their worst day so far in 2023.
“The yield curve is rising…this time, it looks like the market is playing along with rate-feeder funds,” senior technical analyst Mark Arpeter, president of Arpeter Investments, said in a note. Generally, market rates tend to lead the way, he observed.
Since the start of the month, traders in fed-funds futures have priced in a more aggressive Federal Reserve after initially doubting the central bank would hit its forecast for a peak fed-funds rate above 5%. A few traders are now pricing in even an outside possibility of a peak rate near 6%.
The yield on the 2-year Treasury note
It rose 10.8 basis points to 4.729%, its highest closing in a US session since July 24, 2007. 10-year Treasury yield
It rose 12.6 basis points to 3.953%, the highest since November 9.
“At this point, the bond market has abandoned optimistic expectations for limited further hikes and continued rate cuts in the back half of 2023,” Daniel Berkowitz, director of investments at Prudential Management Associates, said in emailed comments.
Meanwhile, the US dollar also rallied, with the ICE US Dollar Index adding 0.2% on a February bounce. Arbiter also noted that breadth indicators, which are measures of how many stocks are participating in a rally, have worsened earlier, with some measures reaching oversold levels.
“Another perfect storm against the stock markets in the short term,” Arbeter wrote.
Rising yields could be negative for stocks, raising borrowing costs. More importantly, higher Treasury yields mean that the present value of future profits and cash flows are discounted more heavily. It will be heavily weighted towards technology and other so-called growth stocks. Those stocks fell heavily last year, but have pared gains in a rally in early 2023, and remained resilient until last week, even as yields extended a bounce.
Yields are rising after a flurry of warmer-than-expected economic data that has boosted expectations for a central bank rate hike.
Meanwhile, Home Depot Inc had weak guidance on Tuesday.
and Walmart Inc.
A weak stock market tone also contributed.
Home Depot fell more than 7%, the biggest loss among components of the Dow Jones industrial average
The decline comes after the home improvement retailer reported a sharp decline in same-store sales in the fiscal fourth quarter, leading to a sharp drop in profits for fiscal 2023, and earmarked an additional $1 billion for its affiliates.
“While Wall Street expects resilient consumers following last week’s strong retail sales report, Home Depot and Walmart remain more cautious,” Jose Torres, senior economist at Interactive Brokers, said in a note.
“This morning’s data offers more mixed signals about consumer demand, but during a traditionally weak seasonal trading period, investors are shifting toward a glass-half-empty view, which has so far been the exact opposite, a glass-half-full perspective,” he wrote.
The Dow closed down 697.10 points, or 2.1%, at 33,129.59, while the S&P 500
It fell 2% to close at 3,997.34, closing below the 4,000 level for the first time since January 20. The drop reduced the S&P 500’s year-to-date gain to 4.1%, less than half of the 9, according to FactSet. % annual gain experienced at February 2 peak.
It fell 2.5%, cutting its year-to-date gain to 9.8%. The losses sent the Dow down 0.5% for the year and marginally negative. It was the worst day for all three major indexes since December 15, according to Dow Jones market data.
Arbeter identified a “very interesting cluster” of support below Tuesday for the S&P 500, with the index’s 50- and 200-day moving averages all converging on a pair of trend lines near 3,970 (see chart below).
“If that zone doesn’t represent pull-down lows, we still have a problem,” he wrote.