Stock market books worst day of 2023 as rising yields contribute to ‘perfect storm’

A rise in Treasury yields on Tuesday appeared to finally catch the previously resilient stock market, leaving the Dow Jones Industrial Average and other major indexes with their worst day of 2023 so far.

“Yields are rising across the curve… This time, market prices seem to be playing along with feeder funds,” Mark Arpeter, senior technical analyst at Arpeter Investments, said in a note. Generally, market rates tend to lead the way, he observed.

Since the start of the month, traders in fed-funds futures have priced in a more bullish Federal Reserve after initially doubting the central bank would hit its forecast for a peak fed-funds rate above 5%. A few traders are now pricing in even an outside possibility of a peak rate near 6%.

The yield on the 2-year Treasury note

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It rose 10.8 basis points to 4.729%, its highest closing in a US session since July 24, 2007. 10-year Treasury yield

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It rose 12.6 basis points to 3.953%, the highest since November 9.

“At this point, the bond market has abandoned optimistic expectations for limited further hikes and continued rate cuts in the back half of 2023,” Daniel Berkowitz, director of investments at Prudential Management Associates, said in emailed comments.

Meanwhile, the US dollar also rallied, with the ICE US Dollar Index adding 0.2% on a February bounce. Arbiter noted that breadth indicators, which are measures of how many stocks are participating in a rally, have worsened earlier, with some measures reaching oversold levels.

“Another perfect storm against the stock markets in the short term,” Arbeter wrote.

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Rising yields could be negative for stocks, raising borrowing costs. More importantly, higher Treasury yields mean that the present value of future profits and cash flows are discounted more heavily. It will be heavily weighted towards technology and other so-called growth stocks. Those stocks fell heavily last year, but have pared gains in the early 2023 rally, and yields remained resilient until last week, even as a bounce extended.

Yields are rising after a flurry of warmer-than-expected economic data has raised expectations for a central bank rate hike.

Meanwhile, Home Depot Inc had weak guidance on Tuesday.

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and Walmart Inc.

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A weak stock market tone also contributed.

Home Depot fell more than 7%, the biggest loss among components of the Dow Jones industrial average

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The drop came after the home improvement retailer reported a surprise decline in same-store sales in the fiscal fourth quarter, leading to a sharp drop in profits for fiscal 2023 and earmarking an additional $1 billion for its affiliates.

“While Wall Street looks ahead to consumers following last week’s strong retail sales report, Home Depot and Walmart remain more cautious,” Jose Torres, senior economist at Interactive Brokers, said in a note.

“This morning’s data offers very mixed signals about consumer demand, but in a traditionally weak seasonal trading period, investors are moving toward a glass-half-empty view, which has so far been the exact opposite, a glass-half-full perspective,” he wrote.

The Dow closed down 697.10 points, or 2.1%, at 33,129.59, while the S&P 500

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It fell 2% to close at 3,997.34, closing below the 4,000 level for the first time since January 20. The drop reduced the S&P 500’s year-to-date gain to 4.1%, less than half of the 9, according to FactSet. % year-to-date gains experienced at the February 2 peak.

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Nasdaq Composite

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It fell 2.5%, cutting its year-to-date gain to 9.8%. The losses sent the Dow down 0.5% for the year and marginally negative. It was the worst day for all three major indexes since December 15, according to Dow Jones market data.

Arbeiter found a “very interesting cluster” of support below Tuesday for the S&P 500, with a pair of trend lines converging, with the index’s 50- and 200-day moving averages both near 3,970 (see chart below).

“If that zone doesn’t represent pull-down lows, we still have a problem,” he wrote.

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