The prospect of the Federal Reserve not reaching deep into its bottomless pockets is starting to hit home for investors.
The S&P 500 fell 2 percent on Tuesday – the worst one-day slide for the benchmark US index since May – as investors faced an expected wind of heavy bond purchases by the central bank since the start of the pandemic.
“The deep selloff highlights the extent of nerves in the markets surrounding the Fed’s move,” said Fiona Cincotta, senior financial markets analyst at Forex.com.
The impending slowdown in bond buying is a sign of the Fed’s confidence that the economy is recovering from the turmoil of the pandemic. But, Ms Cincotta said, other factors are still cautioning Wall Street.
“There is also a combination of rising energy prices, concerns that inflation could rise further into these higher levels and the fact that consumer confidence is slowing,” she said.
Asian trading declined on Wednesday, though investors indicated confidence could return.
Shares in Japan were down more than 2.6 percent in the afternoon. But losses were more moderate in other Asian markets such as Hong Kong and mainland China. Futures markets were indicating that Wall Street would open marginally higher.
The trigger for Tuesday’s decline, which cut across sectors, was an increase in yields on the benchmark 10-year Treasury note. The Fed is preparing to slow its buying as November, investors are selling bonds ahead of a slump in demand. On Tuesday, it raised the 10-year yield to 1.54 per cent, the highest level since June.
Even though the Fed has said it does not plan to raise interest rates for months or even years, government bond yields are the basis for borrowing costs in the economy. When bond prices fall, yields rise – a move that can Hurdles in stock market performance Because it makes own bonds more attractive and can discourage risky investments.
Tech stocks, which are particularly sensitive to the prospect of higher interest rates, were hit hard on Tuesday. The tech-heavy Nasdaq Composite fell 2.8 percent, its biggest drop since February.
Higher rates would make it more expensive for smaller companies to borrow, and the jump in yields was a blow to many high-flying stock stocks. Online craft marketplace Etsy dropped 6 percent and Shopify fell more than 5 percent. Both companies have grown during the pandemic.
“With tech stocks, you’re betting for a company to have a successful year from now,” said Beth Ann Bovino, chief US economist at S&P Global. “If interest rates go up today, the value you get years from now is discounted.”
The largest technology stocks — notably Amazon, Apple, Microsoft, Google and Facebook — have a Huge pull on the broader market and helped pull the S&P 500 down. Apple fell 2.4 percent and was the tech giant’s best performer. Amazon dropped 2.6 percent, while Microsoft, Facebook and Google were down more than 3.5 percent.
But the fall cut across several sectors. Energy stocks were the exception after oil prices surged earlier in the day. Schlumberger, ConocoPhillips, Halliburton and Exxon Mobil were among the best-performing stocks in the S&P 500, though some of their gains faded as oil futures were lower in the afternoon.
The delta version of the virus remains a cause for concern for investors, while persistent supply-chain disruptions have hit everything auto production To school lunch. In Washington, lawmakers are deeply divided over spending on infrastructure and expanding social programs.
And another pressing battle is underway over raising the country’s debt limit – a dispute that could trigger a government shutdown. Treasury Secretary Janet L. Yellen on Tuesday warned lawmakers of “disastrous” consequences if Congress does not tackle the debt limit before October 18.
The unease in the stock’s performance over the past four weeks is clearly visible. The S&P 500 is approaching a 4% decline for September, ending seven consecutive months of gains. The winning streak had propelled shares up more than 20 percent, as investors seemed to have largely brushed off any bad news.
The bumpy moments usually involve the Fed. Tuesday’s trading echoed volatility from earlier this year, when a jump in rates shook financial markets. The increase came as traders worried that higher inflation could lead the Fed to raise rates sooner than officials forecast.
“There’s no doubt that the equity market doesn’t like higher rates — there’s no debate about it,” said Ralph Axel, director of US rates strategy at Bank of America.
Lauren Goodwin, an economist at New York Life Investments, wrote in a note to clients that investors have begun to look for safer investments in China, weighing concerns including debt-limit battles and regulatory actions.
The Chinese government has shown signs of a swift departure from policies that have guided its economy over the past decade, tightening regulation on topics such as online gaming and data sharing by tech companies. And Beijing has so far been reluctant to bail out Evergrande Group, a beleaguered residential developer with $300 billion in debt, another change from typical policy.
But, Ms. Goodwin wrote, such risks “should do little to affect the broader fundamental environment.” Instead, she said, the forces driving the market in the near future will remain the same ones that have done so over the past 18 months: the spread of the virus, government spending and decisions by the Federal Reserve.
“The path will depend on our three highly uncertain drivers – the pandemic, monetary policy and fiscal policy,” she wrote.
While the bond-buying recession will begin sooner rather than later, the Fed’s core policy interest rate — its more powerful and traditional tool — is near zero. and Fed Chairman, Jerome H. Powell, and his colleagues have indicated that the central bank is a long way from raising interest rates because it wants to see the job market come back in full force before doing so.
“The test is high enough to raise interest rates,” Mr. Powell said at a Senate Banking Committee hearing on Tuesday. What the Fed wants to see, he said, is a “very strong” labor market: “the kind of thing we saw before the pandemic struck.”
Jenna Smialek And Matt Phillips Contributed reporting.