Stock market closes firmly lower as surge in bond yields sparks equity revaluation

Stock market closes firmly lower as surge in bond yields sparks equity revaluation

S&P 500, Nasdaq book worst day since June

The S&P 500 and the Nasdaq on Thursday booked their worst sessions in about three months as a powerful climb in government bond yields rippled through Wall Street, forcing a broad reassessment of assets perceived as risky, like stocks.

How did the major benchmarks do?

The Dow Jones Industrial Average DJIA, -0.75% fell 200.91 points, or 0.8%, to 26,627.48, but had been down by as many as 357 points, or 1.3%, at the session’s lows. The decline was the worst point drop for the blue-chip gauge since July 11 and the biggest percentage drop since Aug. 10, according to Dow Jones Market Data. The S&P 500 SPX, -0.82% lost 23.90 points, or 0.8%, to 2,901.61, and the Nasdaq Composite Index COMP, -1.81% skidded 145.57 points to 7,879.51, a drop of 1.8% that had some indications of panic-like selling. Thursday’s drop marked the sharpest for the S&P 500 and the Nasdaq since late June.

Wall Street’s so-called fear index VIX, +22.48% meanwhile, jumped more than 30% to 15.84 at one point, held but below its long-term average between 19 and 20. The index tends to rise as stocks fall.

The day’s losses were widespread, with nine of the 11 primary S&P 500 sectors in negative territory. Utilities and financials were the only sectors to end in positive territory.

The S&P 500 also narrowly avoided snapping a 71-day streak of trading without a swing of at least 1%, highlighting a level of rangebound action for the broad-market index. Last year, the S&P 500 went 95 consecutive sessions without a 1% move, between Sept. 12, 2017 and Jan. 26, 2018.

What drove markets?

The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, +0.39% was up 3.8 basis points at 3.196% and earlier topped 3.23% to trade at its highest since 2011. This comes a day after its largest one-day rise since March 2017. Investors dumped bonds as economic indicators pointed to continued strength in the economy.

A higher yield can dampen enthusiasm for stocks, as it offers higher returns for income-seeking investors, without the risk or volatility typically associated with equities.

In the latest economic data, jobless claims fell by 8,000 in the latest week and are hovering near multidecade lows. The report comes after Wednesday’s strong reading on private-sector employment. Separately, factory orders rose 2.3% in August, a tick above the 2.2% that had been expected.

Thursday’s gyrations add even greater import to the closely watched September jobs report, due early Friday.

What are market analysts saying?

“We’ve had really strong data and commentary from Fed officials, which is bullish for equities, but that comes with the side effect of having people think we should expect more inflation and interest-rate increases, which in turn is a negative for equities,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab.

“The long-term uptrend remains intact, but given these issues, there’s limited room for upside in the short term, especially since markets are at or near records,” he said.

“Yields spiking up this week have caught many by surprise and some repricing is happening; however, the reason yields are rising are positive, not negative,” said Jamie Cox, a managing partner at Harris Financial Group, who argued that higher yields are a result of a strong economy.

He urged investors to “calm down and stop with the hysteria about rates torpedoing the economy” as he doesn’t expect yields rise much further.

What stocks were in focus?

Cloudera Inc. CLDR, +11.53% jumped 11.5% and Hortonworks Inc. HDP, +11.88% surged 12% after the two companies late Wednesday announced an agreement to merge.

Shares of Barnes & Noble Inc. BKS, +21.79% soared 22% after the bookstore chain said its board of directors has decided to enter a formal review process to evaluate “strategic alternatives” for the company.

Eli Lilly & Co. LLY, +4.02% shares rose 4% after the drug company announced positive results from a trial of its diabetes treatment.

Shares of Arrowhead Pharmaceuticals Inc. ARWR, -17.40% sank 17.4% after it entered a $3.7 billion license and cooperation agreement with Janssen Pharmaceuticals Inc. to develop and commercialize its ARO-HBV treatment for chronic hepatitis B.

Pier 1 Imports Inc. PIR, -1.95% shares fell 2%. The retailer late Wednesday reported a second-quarter loss that widened from the prior year and was wider than expected, along with revenue that missed expectations.

How did other markets do?

Shares in Asia ended lower, with Hong Kong’s Hang Seng Index HSI, -0.51% down 1.7%. Major European indexes also finished lower.

Crude-oil prices CLK9, -2.29% closed sharply lower, retreating from four-year highs, while gold GCM9, +0.04% settled marginally in the red. The U.S. dollar index DXY, +0.07% traded mostly flat.

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