US equities take another week of losses, Dow closes at lows since November 2020 as bond yields beat equities after Fed rate hike

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

For the week, the Dow was down 4% while the S&P 500 slid 4.6% and the Nasdaq tumbled 5.1%, according to Dow Jones Market Data. All three major indices fell for the second consecutive week.

What drove the markets

US equities fell sharply on Friday as market volatility increased on the back of the Federal Reserve which posted a third consecutive three-quarter percentage point interest rate hike on Wednesday.

“The risks of recession have risen and no one wants to be the last to walk out the door,” said Russell Evans, general manager and chief investment officer of Avitas Wealth Management, in a telephone interview Friday. “The market is rushing to overcome what the market considers inevitable.”

Investors fear that the prospect of a so-called soft landing for the US economy is diminishing as the central bank maintains its aggressive pace of monetary policy tightening in an effort to fight high inflation. After announcing his latest strong rate hike on Wednesday, Fed Chairman Jerome Powell once again warned that his job is not done.

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

The S&P 500 closed on Friday up 0.7% from its 2022 close low of 3666.77 on June 16, while the Dow dug a new low this year to close at its lowest close since November 20, 2020. according to Dow Jones Market Data.

See: The Fed will tolerate a recession and 5 other things we learned from Powell’s press conference

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

The 10-year Treasury bond yield TMUBMUSD10Y,
3.687%
It fell one basis point on Friday to close at 3.695%, after rising Thursday to its highest rate since February 2011 based on 3pm Eastern Time levels, according to Dow Jones Market Data.

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

“The price action has been really, really chaotic all week, and it has been mostly driven, in my view, by the bond market,” said Mike Antonelli, Baird’s market strategist.

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

See: Bond yields rise, pound falls to 37-year low as UK unveils deficit-funded tax cuts that raise concerns for investors

“We have new tax cuts in the UK, which may require further rate hikes from the Bank of England,” said Jeff Kleintop, Charles Schwab’s chief global investment strategist, in a telephone interview on Friday.

“UK tax cuts are likely to pump more money into the economy, which is likely to create more demand and further fuel inflation,” Kleintop said. This, in turn, could cause the Bank of England to hike rates even higher at a time when investors are concerned that central bank tightening of monetary policy is increasing the risks of a global recession. , he has declared.

One of the biggest challenges facing markets right now is rising real rates, i.e. Treasury yields minus the break-even inflation rate of inflation-protected bonds. Real rates have risen sharply over the past six weeks as investors reacted to factors including data showing surprisingly strong inflation in August.

“Due to the discount effect, higher real rates are lowering the equity risk premium, and this is the big challenge for the market,” said Brad Conger, vice chief investment officer at Hirtle, Callaghan & Co.

If there is a bright side for the markets at this point, it is that stocks and bonds look a little oversold here as a lot of bad news – including a federal funds terminal rate north of 4.5% – has already been around. priced, Conger said. “If there is marginal good news … it could shoot us higher,” he added.

On the economic data front, S&P Global US purchasing manager flash index readings for the manufacturing and services sectors helped push the composite PMI to 49.3 in September, outperforming the FactSet consensus number.

It’s still a “light read,” said Charles Schwab’s Kleintop. “However, it would suggest the risk of a slight contraction for third quarter GDP.”

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

In the meantime, the market is highly likely to see bearish guidance in the upcoming third quarter earnings season after seeing the resilience of corporate earnings growth this year, according to Kleintop. “This could be one last support for the market which could start to deteriorate,” he cautioned.

Evans of Avitas Wealth Management says he recently sought out buying opportunities in the stock market carnage. “I added some tech stocks, but very big established tech stocks,” he said.

Companies at the center
  • Costco Wholesale
    COST,
    -4.26%
    shares fell 4.3% after delivering fourth quarter results at the end of Thursday. The wholesaler said it is seeing higher transport and labor costs and reported slightly lower operating margins than consensus expectations.

  • Actions of Chevron Corp. CVX,
    -6.53%
    fell by 6.5% e Boeing Co.
    BA,
    -5.37%
    It fell 5.4%, dragging the Dow lower as two of the worst performers in the index on Friday.

  • FedEx Corp.
    FDX,
    -3.37%
    Shares fell 3.4% after the company announced cost cuts and shipping rate hikes a week after its outlook was retired, which had caused its stock tank and even damaged the stock more. ample.

—Steve Goldstein contributed to this report.

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