Shifting Into Reverse: Stocks Plunge Late As Yield Spike Seems to Spook

Stocks took a late dive from their midday rally as concerns about rising yields appeared to grow.

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(Wednesday Market Close) After spending most of the day higher Wednesday, stocks reversed course in the very last half hour of trade as bond yields spiked again. Though overall losses were more contained than on Monday, it still represented the biggest one-day reversal since February 2016, and points up the volatility still associated with this market.

If there’s a lesson to take away from Wednesday’s action, it’s that stocks remain intensely vulnerable to signs of rising borrowing costs and inflation fears. The S&P 500 (SPX) fell 0.5% after earlier registering solid gains and climbing back above 2,700. The Dow Jones Industrial Average ($DJI), which had been up hundreds of points earlier in the session, came all the way back down to post a slight loss. And the tech-heavy Nasdaq fell nearly 1% amid info tech sector struggles. It’s looking tough for stocks to hold gains as long as yields keep advancing. 

Ten-year Treasury bond yields raced back to near 2.85% by the closing bell. The pressure on bonds continued as many investors seem to believe higher rates are coming no matter what. People didn’t step in to buy bonds this week the way they often do when the stock market plunges, though there was some buying on Monday when things looked really bleak in stocks. Since then, yields are up about 15 basis points for the benchmark 10-year Treasury bond. Higher rates appear to be giving the financial sector some support, and they’re also weighing on crude oil in a big way.

The falling oil prices also illustrated something that’s occurring more broadly here at mid-week, namely that markets seem to be acting more the way you might expect them to. Relationships are coming back a little, though not everything is solved by any stretch of the imagination.

For instance, oil often falls when the dollar strengthens, and that’s just what occurred today. The dollar index, which had dipped below 89 earlier this week, rode a wave of buying all the way up to 90.34 by the time the stock market closed, up 0.74% on the day. Higher interest rates would seem to imply a higher dollar over time, but that’s a relationship that hadn’t really been seen lately until the last day or two. Keep an eye on the dollar index to see if it keeps gaining strength amid these rising bond yields. Typically, investors buy the dollar when they’re optimistic about the U.S. economy, and fundamentals do continue to look strong.

Speaking of fundamentals, they also played a role in the oil market dive. Crude cratered more than 2% to one-month lows below $62 a barrel and it wasn’t only because of the dollar. It also came on the heels of higher than expected supply inputs and growing production in the U.S., analysts said.

In another sign that the market hasn't completely recovered from its recent dive, the Nasdaq spent much of the day under pressure as info tech struggled. Stocks like Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), and Amazon (AMZN) all fell despite the lack of any real obvious fundamental news. On a more positive note, industrial stocks led the way and defense stocks got a shot in the arm from news at mid-session that the Senate had reached a bipartisan budget deal that would fund the Defense Department. It’s still unclear if Congress has enough votes to pass an agreement before Thursday’s deadline to keep the government open.

While the Nasdaq and SPX ended the day lower, small-caps found some buying interest. The Russell 2000 actually rose a little, but was down from earlier highs along with everything else.

It’s way too soon to say volatility is going away as a factor. Though the VIX is now below 30, it remains elevated and climbed back to 26 late Wednesday from lows in the 21-range earlier on. Everything is about interest rates right now, so it wouldn’t be surprising if the market goes where yields lead on Thursday, as well.

SPX

FIGURE 1: YIELDS END RECESS.

Rising yields took the punch bowl away from the stock market late Wednesday, as this intraday chart of the S&P 500 (SPX, candlestick), and 10-year yields shows. Data sources: Standard & Poor’s, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Good Trading,
JJ
@TDAJJKinahan

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