NEW YORK – A telltale inflation report that was hotter than expected hit the bond market on Wednesday, pushing yields up and helping to push stocks lower.
Prices for beef, electricity and other items that consumers paid in October jumped from last year’s levels at the fastest overall pace since 1990, suggesting the Federal Reserve will have to Raise short-term interest rates faster from their all-time low. This sent Treasury yields to their biggest gains in months.
Rising yields tend to be a drag on stocks, especially those considered the most expensive or where expectations of significant earnings growth are farthest in the future. Declines in several high-growth tech stocks weighed on Wall Street, as did the decline in energy stocks following a drop in the price of crude oil.
The S&P 500 lost 38.54, or 0.8%, to 4,646.71 for its second consecutive decline. He’s just come out of a strong race where he set a record in each of the previous eight days.
The Dow Jones Industrial Average fell 240.04, or 0.7%, to 36,079.94. The Nasdaq composite, which has more tech stocks, fell further. It lost 263.84, or 1.7%, to 15,662.71.
Concerns about inflation fueled other parts of the market. Gold rose 1% and is near its highest price since June. Bitcoin, which some proponents see as offering inflation protection similar to that of gold, has also climbed. It hit a record high of nearly $ 68,991, according to CoinDesk.
The focus of Wall Street action, however, was in the bond market.
Driven by the inflation report, investors are now banking on a 66.5% probability that the Fed will hike rates by the end of June. A day earlier, this probability was 50.9%.
The Fed has been keeping overnight rates at a record high near zero since March 2020 to resuscitate markets and the economy from the pandemic. He has already started cutting back on his monthly bond purchases to keep long-term rates low.
The two-year Treasury yield tends to move with Fed action expectations, and it jumped to 0.51% from 0.41% on Tuesday night, a significant move.
Longer-term Treasury yields also rose, with the 10-year yield reaching 1.57% from 1.43%.
In the stock market, higher yields tend to favor stocks that look cheap, or at least cheaper than their peers. These are often referred to as “value” stocks to distinguish them from stocks of high growth companies.
“It’s a fight between growth and value, and neither has really taken over lately,” said Tom Martin, senior portfolio manager at Globalt Investments. “You’re going to have a decent market until the end of the year and at some point you’ll see people really starting to try to position themselves for what they think 2022 might look like.”
The declines in some high growth and tech stocks have caused the heaviest weights in the market, as they are among the largest companies in terms of value. Nvidia, the parent company of Facebook, the parent company of Google, Apple and Microsoft all fell between 1.5% and 3.9%.
A 3.3% drop in the price of US oil also helped push energy stocks to the biggest loss among the 11 sectors that make up the S&P 500.
But nearly two in five stocks in the index rose nonetheless, with gains in health care and other stocks helping to limit losses for the market. Pfizer rose 3.6%.
Tesla also regained some of the ground lost the previous two days after its CEO, Elon Musk, said he would sell 10% of his stake in the company. It rose 4.3%, but remains down 12.6% for the week.
Rivian Automotive, an electric truck maker backed by Amazon and Ford, rose 29.1% on its first day of listing.
Shares have risen broadly in recent weeks, fueled by reports showing corporate profits were even higher over the summer than analysts had expected. Many of these reports have shown that companies are able to pass on the higher prices they pay to their customers, thus preserving their profitability.
DoorDash rose 11.6% after reporting higher than expected revenue for its last quarter and announcing it was purchasing Finnish delivery service Wolt Enterprises, expanding its reach into Europe and other markets.
This earnings season is coming to an end, with over 90% of the S&P 500 reports already in hand. But several big names are still to come, especially in retail.