Stocks and bonds fell on Thursday as investors pared back expectations for interest rate cuts by the Federal Reserve this year. Major indexes ended lower for a second straight session, erasing some of 2023’s big gains.
- The S&P 500 fell 0.6% and the tech-heavy Nasdaq dropped 1%
- Benchmark 10-year Treasury yields topped 3.75%, weighing on growth stocks
- Minutes from the Fed’s December policy meeting showed officials expect rates to top 5% this year
- Apple stock fell after Bank of America downgraded it on smartphone demand concerns
Stocks declined for a second day on Thursday as Treasury yields climbed, reducing the appeal of equities, especially pricey technology names.
The benchmark S&P 500 dipped 0.6% to close at 3,964. The tech-dominated Nasdaq fell 1% to 10,305. The Dow Jones Industrial Average outperformed with a small drop of 0.1% to 33,045.
“It looks like we’re going to have a second down day as rates spike here,” said Ryan Detrick of Carson Group. “The continued weakness in big tech stocks is most likely causing overall market weakness here.”
Yields on the key 10-year Treasury note, which help set borrowing costs for mortgages and other important kinds of loans, jumped back above 3.75%. That rate heavily influences where investors feel comfortable parking money. When it rises quickly, it forces downward pressure on stocks.
Fed Minutes Temper Rate Cut Hopes
Stocks dropped further after minutes from the Federal Reserve’s meeting last month showed officials expect to raise their benchmark rate higher than previously expected and keep it there for longer to battle inflation.
The minutes showed Fed officials discussed the need to raise the central bank’s key rate above 5% and keep it there for some time to slow the economy enough to bring inflation down. The Fed’s key short-term rate is now in a range of 4.25% to 4.5% after starting last year at near zero.
The Fed’s next policy announcement is set for Feb. 1. Investors are largely forecasting a raise of just 0.25 percentage points next month, down from December’s half-point hike and four prior increases of 0.75 percentage points.
The minutes showed Fed officials still think rates have to rise more to ensure inflation gets back down to its 2% goal, though their decision will depend on economic data.
Recently improved data suggest the economy remains more resilient than feared despite last year’s sharp rate hikes, according to some economists. The U.S. job market is strong, consumer spending has recovered from an early 2022 slowdown and inflation has cooled from summertime highs. All that has gotten investors to pencil in rate cuts happening late this year. Now markets are less certain of that happening.
|Key Interest Rates
|Fed Funds Rate
|10-Year Treasury Yield
Growth Stocks Under Pressure
Rising yields put pressure on investments seen as the most expensive or the most vulnerable to higher rates. Those include high-growth technology stocks.
Apple fell 1.4% and Microsoft shed 2% after Bank of America cut its rating on Apple, expecting demand for its products to weaken. Amazon dropped 2.4% and Tesla fell 3.9%.
Technology stocks have posted massive gains over the last decade as investors bet big on the ability of their products and services to transform industries and generate huge profits in the future. But higher interest rates place a premium on investments with more immediate growth or payouts like regular dividends instead of expected profits far off into the future.
Market Performance So Far in 2024
U.S. equity markets struggled to start 2024 following a dismal end to 2022 and mounting evidence of an economic slowdown.
The S&P 500 finished 2022 down 19.4%, its biggest annual decline since 2008. Rising interest rates that slowed the economy and high inflation were the main reasons for Wall Street’s 2022 struggle.
Now the economy is showing more signs of slowing and inflation remains hotter than the Federal Reserve wants despite 2022’s aggressive rate hikes. The latest round of corporate earnings results is also indicating that profits are taking a hit.
|2024 YTD Performance
|Dow Jones Industrial Average
Outlook for Stocks
Many analysts expect stocks to continue facing volatility in early 2023 but see gains resuming later in the year as inflation cools and economic growth finds firmer footing.
“Our positive 2023 outlook for equities and fixed income is underpinned by our view that the U.S. economy can navigate through a mild recession and that inflation pressures will continue to ease,” noted Mark Haefele, chief investment officer at UBS Global Wealth Management.
The expected cooling of inflation toward the Fed’s 2% target would ease pressure on consumers and free up more money for spending on services, retail and other areas of the economy.
Lower inflation also would make the Fed less likely to continue raising interest rates at a pace that slows economic growth and squeezes corporate profits. It could even open the door for rate cuts, which tend to boost investment prices, in the latter part of the year.
“Recession fears have been the key topic for markets,” said David Kelly, chief global strategist at JPMorgan Funds. “However, while recent economic reports clearly show a sharply slowing economy, there is no confirmation yet of an actual downturn.”
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