U.S. stocks were sliding on Tuesday, as the stock market seems to finally be having its “taper tantrum.”
“Bottom line, the stock market is being driven by the bond market this week and if we see bonds continue to drop (yields spike higher) then that will result in further underperformance by growth stocks and drag the broader market lower while stabilization in yields would likely allow for a rebound,” wrote Tom Essaye, founder of Sevens Report Research.
A “taper tantrum” is when the Federal Reserve indicates that it will taper, or reduce, the amount in bonds it is buying per month as the economy recovers and needs less support. This last happened in 2013, several years after the financial crisis, when the Fed had decided to gradually phase out its bond buying program. Less money moving into the bond market lowers bond prices and raises their yields. Higher yields on long-dated bonds make future profits less valuable, which dents stock prices.
The 10-year Treasury yield has risen to 1.54% from a 1.48% close Monday, and is up from 1.31% last week. Bond yields began to spike after the Federal Reserve made clear that it will taper its bond purchases to zero by mid 2022.
Not only is the Fed likely to eventually remove the $120 billon it is plowing into the bond market within less than a year, but yields have been relatively low anyway. The race higher in bonds yields isn’t a huge surprise to some on Wall Street, as the yield is still below long-term inflation expectations of above 2%, according to St. Louis Fed data, making the bond less attractive to buy than if it were providing a return greater than inflation.
The hit to stock valuations from higher yields is particularly painful for fast-growing technology stocks because those are valued on profit growth many years into the future, making their valuations highly sensitive to changes in long-dated yields.
The Nasdaq 100, which contains 100 of the largest market capitalization stocks on the technology-heavy Nasdaq, was falling 2.5%.
(ticker: AMZN) fell 2.8%.
Zoom Video Communications
(ZM) fell 4.4%.
Meanwhile, bank stocks weren’t falling nearly as hard as the broader market was, with the
SPDR S&P Bank Exchange-Traded Fund
(KBE) down just 0.4%. When long-dated bond yields rise faster than short-term interest rates, banks can lend at higher rates and still borrow at low rates, boosting near-term profitability.
The U.S. consumer confidence index fell to a reading of 109.3 in September, the Conference Board reported Tuesday, dropping to a 7-month low.
The political debate over the U.S. debt ceiling and looming government shutdown added even more black clouds to the market. U.S. Federal Reserve Chair Jerome Powell is addressing lawmakers, along with Treasury Secretary Janet Yellen. Yellen warned that the Treasury would default on its loans if lawmakers don’t suspend or raise the debt ceiling by Oct. 18.
While the stock market’s drop is alarming, investors will watch whether the S&P 500 falls to its 100-day moving average, a key technical level. If it falls below far that level, it indicates investors are losing even more confidence. If buyers step in at that level, that’s a positive sign for the market.
The pan-European Stoxx 600 was down 2.2%.
Tokyo’s Nikkei 225 fell 0.2%, in line with other Asian stocks outside of China, where industrial production is under pressure from a power crunch and economic growth prospects are downbeat. Both Goldman Sachs and Nomura downgraded forecasts for Chinese growth in 2021.
Here are 11 stocks on the move Tuesday:
(MRK) stock rose 0.2% after news broke that it is in talks to acquire drugmaker
(XLRN), which is seeing its stock rise 2.3%.
(THO) stock rose 8.5% after reporting a profit of $2.88 a share, beating estimates of $2.14 a share, on sales of $3.6 billion, above expectations for $3.3 billion.
(AMAT) stock fell 6.8% after getting downgraded to Neutral from Buy at New Street.
(F) was 3.2% higher, after a 1.2% jump Monday. The automotive giant has been boosted by rising bond yields, and on Monday announced the largest single manufacturing investment in its 118-year history, with $11.4 billion in spending to boost electric-vehicle battery manufacturing.
Rising crude prices continues to boost major oil companies, with
(BP.U.K.) rising 1.6% and
Royal Dutch Shell
(RDSA.U.K.) climbing 1.1% in London, and
(TTE.France) lifting 1.1% in Paris.
(EZJ.U.K.) fell 3.5% in London, after the company reported that its £1.2 billion ($1.6 billion) rights issue was 93% subscribed.
Write to Jacob Sonenshine at email@example.com