US stocks were down on Tuesday as the stock market finally appears to be experiencing its “temper tantrum.”
A “taper tantrum” occurs when the Federal Reserve indicates that it will decrease or reduce the amount of bonds it purchases a month as the economy recovers and needs less support. The latter occurred in 2013, several years after the financial crisis, when the Fed decided to phase out its bond buying program. Less money entering the bond market lowers bond prices and increases bond yields. Higher yields on long-term bonds make future earnings less valuable, which in turn lowers stock prices.
“The Fed was a bit more hawkish at its last meeting, leading some to fear a repeat of the ‘taper tantrum’ of 2013 which turned out to be a tough time for all risky assets,” Brian writes. Price, Head of Investment Management for Commonwealth Financial. Network. “Anytime we see the 10-year UST yield move so dramatically over a short period of time, especially from low starting levels, it usually coincides with a market sell-off of some magnitude.”
The 10-year Treasury yield rose to 1.53% from 1.48% on Monday’s close, and is up from 1.31% last week. Bond yields started to climb after the Federal Reserve made it clear it would cut its bond purchases to zero by mid-2022.
Not only will the Fed end up withdrawing the $ 120 billion it is investing in the bond market within a year, but yields have been relatively low anyway. The rush in bond yields is not a huge surprise to some on Wall Street, as the yield is still below long-term inflation expectations above 2%, according to data from the St. Louis Fed. , which makes the bond less attractive to buy than if it offered a yield above inflation.
The impact on stock valuations of higher yields is particularly painful for fast-growing tech stocks. This is because these are valued on earnings growth many years into the future, which makes their valuations very sensitive to changes in long-term returns.
The Nasdaq-100, which contains 100 of the largest market-cap stocks on the technology-heavy Nasdaq, was down 2.5%.
(ticker: AMZN) fell 3%, while
Focus on video communications
(ZM) fell 4.3%.
“As rates rise, Nasdaq executives are under pressure,” writes Andrew Brenner of NatAlliance Securities.
Meanwhile, bank stocks have not fallen as sharply as the broader market, with the
SPDR S&P Bank Exchange Traded Fund
(KBE) down just 0.8%. When long-term bond yields rise faster than short-term interest rates, banks can lend at higher rates while continuing to borrow at low rates, thereby increasing short-term profitability.
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The US consumer confidence index fell to 109.3 in September, the Conference Board reported on Tuesday, falling to a 7-month low.
The political debate over the US debt ceiling and the impending government shutdown have added even more dark clouds to the market. US Federal Reserve Chairman Jerome Powell addresses lawmakers, as well as Treasury Secretary Janet Yellen. Yellen warned the Treasury would default on its loans if lawmakers did not suspend or increase the debt ceiling by October 18.
While the stock market decline is alarming, investors will be watching if the S&P 500 falls to its 100-day moving average, a key technical level. A drop in the index below this level would indicate that investors are losing even more confidence. If buyers are intervening at this level, it is a positive sign for the market.
Read more: When will the Senate vote on shutting down the government?
The pan-European Stoxx 600 is down 2.2%.
Tokyo’s Nikkei 225 fell 0.2%, in line with other Asian stocks outside China, where industrial production is under pressure due to an electricity crisis and prospects for economic growth are unfavorable. Goldman Sachs and Nomura both lowered their forecasts for Chinese growth in 2021.
Here are 11 actions in motion on Tuesday:
The stock (MRK) was essentially flat after the announcement of the acquisition of a drugmaker
(XLRN) which saw its title climb 4.6%.
United natural foods
(UNFI) gained 22.2% after the company reported earnings of $ 1.18 per share, beating estimates by 80 cents per share, on sales of $ 6.7 billion, below expectations of 6 , 8 billion dollars.
(THO) stock rose 7.2% after the company reported earnings of $ 2.88 per share, beating estimates of $ 2.14 per share, on revenue of 3.6 billion dollars, higher than expectations of 3.3 billion dollars.
The stock (AMAT) fell 6.9% after being demoted to Neutral Buy on New Street.
(F) was 1% higher, after surging 1.2% on Monday. The auto giant’s action was boosted by rising bond yields and on Monday announced the biggest manufacturing investment in its 118-year history, spending $ 11.4 billion in spending to boost battery manufacturing of electric vehicles.
(SAN.France) fell 0.5% in Paris, as it announced it would stop development of its Covid-19 mRNA vaccine.
Rising crude prices continue to stimulate major oil companies, with
(BP.UK) up 1.6% and
Royal Dutch Shell
(RDSA.UK) up 1.1% in London, and
(TTE.France) up 1.1% in Paris.
(EZJ.UK) fell 3.5% in London, after the company announced that its £ 1.2bn ($ 1.6bn) rights issue was 93% underwritten.
Write to Jacob Sonenshine at [email protected]