U.S. stocks slumped Thursday, pulling back from record levels, as U.S. Treasury yields surged to multiyear highs.
Bond yields have jumped over the past week as data have pointed to a robust U.S. economy and investors have expressed relief over easing trade tensions in North America. Further evidence of a strong U.S. economy will likely come Friday, when investors get a snapshot of September’s employment picture.
“Recent data has shown that Americans are pretty confident in finding jobs,” said Christopher Ryon, a portfolio manager at Thornburg Investment Management. “That supports seeing lower unemployment, and I would expect to see wage pressures increase. As that happens, I anticipate also seeing more pressure put on inflation and, consequently, interest rates.”
The Dow Jones Industrial Average fell 200.91 points, or 0.7%, to 26627.48, a day after notching an all-time high and snapping a fifth-session streak of gains. The S&P 500 lost 23.90 points, or 0.8%, to 2901.61 and the technology-heavy Nasdaq Composite declined 145.57 points, or 1.8%, to 7879.51.
Nine of the 11 S&P 500 sectors tumbled, with the highflying technology and consumer-discretionary segments among the biggest losers. Netflix dropped more than 3%, while Google parent Alphabet , Facebook and Amazon.com shed more than 2%.
Consumer-focused stocks such as Nike and Home Depot were the biggest decliners in the Dow industrials, both losing more than 2%.
Interest-rate-sensitive sectors such as real estate and consumer staples also declined—rising bond yields can diminish the allure of high-dividend-paying stocks.
The yield on the 10-year U.S. Treasury note, a bellwether for risk sentiment around the world, settled at 3.196%, its highest level since July 2011, compared with 3.159% Wednesday. Bond prices fall when yields rise.
The market’s so-called fear gauge, the Cboe Volatility Index, jumped 22% and posted its biggest one-day gain since June. The gauge, also known as the VIX, is based on options prices on the S&P 500 and tends to rise when stocks fall.
“We think Thursday’s market action is just market expectations catching up with where the Federal Reserve is projecting where it’s heading, as well as the strength in the U.S. economy relative to the rest of the world,” said Lisa Erickson, head of the Traditional Investment Group with U.S. Bank Wealth Management.
“As the Fed continues to raise interest rates, it’s going to make it harder for sectors like real estate and utilities that have traditionally been purchased more on a yield-play basis.”
Traders are growing more confident about the Federal Reserve’s 2019 rate path. Fed-funds futures, used by traders to place bets on the course of interest rates, recently showed the market pricing in a 39% chance of the Fed raising rates three times between now and June 2019, according to CME Group. That’s up from 30% one week ago and 19% one month ago.
A key data point in Friday’s jobs report could set the stage for more volatility. In February, a downturn in the U.S. stock market was precipitated by an employment report that showed strengthening wage growth, which raised concerns that rising inflation could lead to the Federal Reserve being more aggressive in tightening monetary policy.
If September’s employment report shows average hourly earnings rising above 3% from a year ago, the markets could react negatively, said David Spika, president of GuideStone Capital Management.
“It’s going to be a number that’s psychologically difficult for the market to handle,” he said.
Economists noted that there could be a drop in Friday’s wage data because wages jumped in September 2017, which was attributed in part to low-wage workers not working because of Hurricanes Harvey and Irma.
Rising inflation has also renewed concerns about a flattening yield curve, which measures the dispersion between shorter-term and longer-term rates. The so-called yield curve is widely viewed as an indicator of sentiment for economic-growth prospects. Thornburg’s Mr. Ryon, however, said he wasn’t concerned about a steepening yield curve being a precursor to a recession.
Typically in the past when there has been a flat or inverted yield curve, the central bank has attempted to slow down an overheated economy, he explained. The Fed is now attempting to normalize interest rates after about a decade of extremely accommodative global central bank policy, in effect to give central bankers more ammunition for when the next recession hits, he said.
Corrections & Amplifications
Mihir Worah is chief investment officer of asset allocation and real return at Pimco. An earlier version of this article misspelled his last name as Wohra.
Write to David Hodari at [email protected]