Dow drops 450 points to lowest level in nearly 2 years as rising bond yields hammer stocks

U.S. stocks fell for a fourth day on Friday, with the Dow Jones Industrial Average reaching a fresh low for 2022, as bond yields and the dollar rose in the wake of the Federal Reserve’s interest rate hike this week.

What’s happening
  • The Dow Jones Industrial Average
    DJIA,
    -1.80%

    shed 460 points, or 1.6%, to 29,608.

  • The S&P 500
    SPX,
    -1.94%

    dropped 67 points, or 1.8%, to 3,689.

  • The Nasdaq Composite
    COMP,
    +0.87%

    fell 201 points, or 1.8%, to 10,867.

On Thursday, the Dow Jones Industrial Average fell 107 points, or 0.35%, to 30077, the S&P 500 declined 32 points, or 0.84%, to 3758, and the Nasdaq Composite dropped 153 points, or 1.37%, to 11067.

Down for three straight sessions, the S&P 500 closed at its lowest value since June 17.

What’s driving markets

Markets have been volatile all week, with all three indexes either hitting new lows or on track to do so, in the wake of the Federal Reserve delivering its third jumbo interest-rate hike. The hike was accompanied by a warning that the central bank no longer anticipates a “soft landing” for the U.S. economy.

As a result, the Dow has surpassed its lows from June to trade at levels last seen in late 2020. if the blue-chip gauge closes at these levels, it would mark its lowest close since at least Nov. 30, 2020, according to Dow Jones Market Data.

See: Fed will tolerate a recession, and 5 other things we learned from Powell’s press conference

Treasury yields have been climbing again since Wednesday, with the 2-year Treasury yield rising to its highest level since 2007 on Friday, causing the spread between the 2-year and 10-year Treasury yields
TMUBMUSD10Y,
3.673%

to further invert back toward its lowest level of the year, which was reached in August, according to DJMD.

“The price action has been really, really chaotic this entire week, and it’s mostly been driven, in my view, by the bond market,” said Mike Antonelli, a market strategist at Baird.

The 2-year Treasury yield
TMUBMUSD02Y,
4.186%

rose 4.2 basis points to 4.169% on Friday.

But it’s not just the Fed that’s spooking markets. A host of other global central banks have also hiked interest rates this week. U.S. equity traders are paying particularly close attention to the U.K., where markets have been roiled by the latest hike from the Bank of England.

See: Bond yields spike, pound slides to 37-year low as U.K. unveils deficit-funded tax cuts that spark investor worries

As a result, the value of the pound
GBPUSD,
-3.18%

has deteriorated to its lowest level in more than 35 years, despite the fact that U.K. sovereign bond yields have risen, which, in theory, should offer support to the nation’s currency. But as the strong dollar continues to streamroll everything in its path, investors are now waiting to see if the pound will reach parity with the dollar, like the euro has.

“Nobody believed it could happen, but all of a sudden it’s not only possible, it’s plausible,” Antonelli said.

The yield on the 2-year gilt, a term used to described British sovereign bonds, rose more than 40 basis points on Friday in its biggest one-day gain since 2010, according to DJMD. At 3.915%, the 2-year gilt yield
TMBMKGB-02Y,
3.910%

is at its highest level since late 2008.

One of the biggest challenges facing markets right now is the rise in real rates — that is, Treasury yields minus the breakeven inflation rate from inflation-protected bonds. Real rates have risen sharply over the past six weeks as investors reacted to a handful of factors, including surprisingly strong consumer-price inflation in August.

“Because of the discount effect, higher real rates are lowing the equity risk premium, and that’s the big challenge for the market,” said Brad Conger, deputy chief investment officer.

If there’s a silver lining for markets at this point, it’s that stocks and bonds are looking a little oversold here as a lot of bad news — including a terminal Fed funds rate north of 4.5% — has already been priced in, Conger said.

“If there’s any marginal good news….it could rocket us higher,” he added.

On the economic data front, strong readings from the flash S&P Global U.S. purchasing managers indexes for both the manufacturing and services sectors helped push the composite PMI to 49.3 in September, outperforming FactSet’s consensus number. However, in Europe the economic downturn deepened in September with business activity contracting for a third consecutive month, S&P Global said. The eurozone composite purchasing managers index fell to 48.2 in September from 48.9 in August, according to the preliminary reading.

Stocks in focus
  • Costco COST stock fell sharply toward a three month low after delivering Q4 results late Thursday. The wholesale retailer said it’s seeing higher freight and labor costs and reported operating margins slightly below consensus expectations.

  • Shares of Chevron Corporation
    CVX,
    -5.61%

    and Boeing Co.
    BA,
    -5.43%

    are helping to lead the Dow lower.

  • FedEx Corporation
    FDX,
    -3.18%

    shares tumbled as the company announced cost cuts and increases in shipping rates one week after withdrawing its outlook, which had caused its shares to tank and even hurt stocks more broadly.

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