Key Points:
- S&P 500 falls to 2-year low as 10-year Treasury yield climbs back toward key 4% level.
- Investors feared that consistently high inflation and rising interest rates would push the country into a recession.
- Rising interest rates are a worry for technology companies, and semiconductor prices have dropped.
Tuesday had just seen a drop in U.S. stocks and a rise in bond yields as investors feared that consistently high inflation and rising interest rates would push the country into a recession and harm corporate profits.
Early in the day, the S&P 500 fell more than 1%, reaching its lowest point since November 2020. However, it recovered part of those losses to trade down 0.59%, weighed down by weaker tech stocks like Meta Platforms, whose high valuations are sensitive to increasing rates. The Nasdaq dropped 1.5%, setting a new 52-week low, as tech and semiconductor stocks declined. Amgen and Walgreens Boots Alliance increased, leading to the Dow Jones Industrial Average gaining 61 points or 0.21%.
Bond prices also decreased. After coming close to the crucial 4% mark overnight, the yield on the US 10-year Treasury increased by around five basis points to 3.937%. A basis point is one-hundredth of one percent, and bond yields are inversely correlated to prices.
Investors made the moves as they anticipated important inflation statistics that would determine how quickly the Federal Reserve would raise interest rates to control inflation. The producer pricing report will be released on Wednesday, while the September consumer price index will be revealed on Thursday. Retail sales for September will provide more data on consumption on Friday.
The direction of the central bank’s interest rate hikes could lead the US economy to enter a recession, which would reduce company earnings.
Depending on whether the Federal Reserve organizes a soft or a hard landing for the economy, JPMorgan CEO Jamie Dimon said on Monday that the United States would probably enter a recession over the next “six to nine months” and that the S&P 500 might fall by another 20%.
In a Tuesday note, David Bahnsen, a chief investment officer of The Bahnsen Group, said that this was an awful stock market environment that was grappling with a weakening economy, uncertainty over earnings and how long the Fed’s tightening would last, and sentiment issues with extremely risk-averse investor psychology.
“We believe the Fed will raise interest rates one or two more times until the Fed funds rate reaches 4% and then take a pause, at which point the Fed will assess the damage done,” he added.
Additionally, the earnings season started this week. Four of the top banks in the world—JPMorgan, Wells Fargo, Morgan Stanley, and Citi—report their quarterly earnings on Friday.
Both the S&P 500 and the Nasdaq Composite hit 52-week lows because of businesses in technology and semiconductors. Rising interest rates are a worry for technology companies, and semiconductor prices have dropped since the Biden Administration limited manufacturing sales to China.
The Technology Select Sector SPDR Fund and the iShares Expanded Tech-Software Sector ETF both hit multi-year lows, with the Technology Select Sector SPDR Fund falling to levels not seen since November 2020 and May 2020, respectively.
Leading semiconductor ETFs also fell to their lowest levels since November 2020.
