Topline
Stocks tumbled Monday as the market digested new risks complicating the benefits of the much-awaited interest rate cuts on the equity market.
Traders work the floor of the New York Stock Exchange.
Key Facts
The Dow Jones Industrial Average fell 0.9%, or 398 points, while the benchmark S&P 500 and tech-heavy Nasdaq fell 1% and 1.2%, respectively.
Monday was the Dow and S&P’s worst respective days since Sept. 5 and the Nasdaq’s worst since last Monday.
The losses followed an escalation of a pair of shocks which threaten to make the cost of doing business higher and thus cut into profit margins.
Crude oil prices, a key input for many companies, and government bond yields, which influence borrowing costs as many loans are benchmarked against Treasury notes, both moved to multiweek highs Monday.
U.S. oil benchmark West Texas Intermediate rose 3.9% to $77.31 per barrel, its highest price since Aug. 30 as Middle East tensions keep pushing the commodity up, and the yardstick 10-year U.S. Treasury note yield rose to 4.03%, its first time over 4% since Aug. 8.
Wall Street’s fear gauge, the CBOE Volatility Index (VIX), rose 19% to a four-week high of about 23, as the metric tracking options contracts betting on the direction of the S&P over the next month similarly responded to increased uncertainty in equities.
Key Background
The recent rise in bond yields comes as a relative surprise compared to expectations for the bond market after the Federal Reserve rolled out a big 50 basis-point rate cut Sept. 18. Treasury yields serve as a rough proxy for fixed income investors’ expectations for monetary policy, and, considering the consensus view that the Fed will keep bringing interest rates down, climbing government bond yields do not align with that view. The 10-year Treasury yield is often used as the baseline for loans such as mortgages, meaning some borrowing costs are actually higher now than they were prior to the Fed’s cut. Bond yields also shot up Friday after the U.S. reported far stronger September job growth than expected. “The bond market is becoming less skeptical on the soft landing outcome,” explained Morgan Stanley strategists led by Michael Wilson in a Monday note to clients.
Contra
Though higher bond yields can evoke bad memories for equity investors—see the 2022 unraveling as the inflation crisis deepened—it’s not necessarily a bad omen for stocks. The 10-year is down a full percentage point over the last year and about 0.4 percentage points over the last six months. And yields are rising because the U.S. economy looks stronger than anticipated, a potential boon for earnings growth, with Wilson noting the increased odds of a soft landing “should support more cyclical leadership in equities.” Over the weekend, Goldman Sachs strategists led by David Kostin raised their year-end price target for the S&P from 5,600 to 6,000 and its 12-month target from 6,000 to 6,300, indicating 5% and 10% further upside, respectively, citing the “steady macro outlook.”
Crucial Quote
“Our job’s to be worried about everything,” Austan Goolsbee, president of the Federal Reserve Bank of Chicago and an alternate member of the Fed’s rate-setting committee, told Forbes last week when asked about how new shocks like higher oil prices may impact the trajectory of monetary policy.
Further Reading
