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

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

“Yields are popping across the curve…This time it seems, market rates are playing catch up with fed funds,” said veteran technical analyst Mark Arbeter, president of Arbeter Investments, in a note. Typically, market rates tend to lead the way, he observed.

Since the beginning of the month, traders in fed-funds futures have priced in a more aggressive 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 even pricing in the outside possibility of a peak rate near 6%.

The yield on the 2-year Treasury note

jumped 10.8 basis points to 4.729%, its highest finish to a U.S. session since July 24, 2007. The 10-year Treasury yield

climbed 12.6 basis points to 3.953%, its highest since Nov. 9.

“At this point, the bond market has all but abandoned optimistic expectations for limited further hikes and a series of rate cuts in the back half of 2023,” said Daniel Berkowitz, investment director for Prudent Management Associates, in emailed comments.

Meanwhile, the U.S. dollar has also rallied, with the ICE U.S. Dollar Index adding 0.2% to a February bounce. Arbeter also noted that breadth indicators, a measure of how many stocks are participating in a rally, had previously deteriorated, with some measures reaching oversold levels.

“Just another perfect storm against the equity markets in the short term,” Arbeter wrote.

Rising yields can be a negative for stocks, increasing borrowing costs. More important, higher Treasury yields mean that the present value of future profits and cash flow are discounted more heavily. That can weigh heavily on tech and other so-called growth stocks whose valuations are based on earnings far into the future. Those stocks were pummeled heavily last year but have led gains in an early 2023 rally, remaining resilient through last week even as yields extended a bounce.

Yields have been on the rise after a run of hotter-than-expected economic data, which have boosted expectations for Fed rate hikes.

Meanwhile, weak guidance Tuesday from Home Depot Inc.

and Walmart Inc.

also contributed to the weak stock-market tone.

Home Depot sank more than 7%, making it the biggest loser among components of the Dow Jones Industrial Average
The drop came after the home-improvement retailer reported a surprise decline in fiscal fourth-quarter same-store sales, guided for a surprise drop in fiscal 2023 profit and earmarked an additional $1 billion to pay its associates more.

“While Wall Street expects resilient consumers following last week’s robust retail sales report, Home Depot and Walmart are much more cautious,” said Jose Torres, senior economist at Interactive Brokers, in a note.

“This morning’s data offers more mixed signals concerning consumer demand, but during a traditionally weak seasonal trading period, investors are shifting toward a glass half-empty view against the backdrop of a year that’s featured the exact opposite so far, a glass half-full perspective,” he wrote.

The Dow slumped 697.10 points, or 2.1%, to close at 33,129.59, while the S&P 500

dropped 2% to close at 3,997.34, finishing below the 4,000 level for the first time since Jan. 20. The drop cut the S&P 500’s year-to-date gain to 4.1%, according to FactSet, which is less than half of the 9% year-to-date gain it had enjoyed at its Feb. 2 peak.

The Nasdaq Composite

fell 2.5%, trimming its year-to-date gain to 9.8%. The losses left the Dow marginally negative for the year, down 0.5%. It was the worst day for all three major indexes since Dec. 15, according to Dow Jones Market Data.

Arbeter identified a “very interesting cluster” of support just below the Tuesday low for the S&P 500, with the convergence of a pair of trend lines along with the index’s 50- and 200-day moving averages all near 3,970 (see chart below).

Arbeter Investments LLC

“If that zone does not represent the pullback lows, we have more trouble ahead,” he wrote.