Dow Falls 300 Points, Bond Yields Surge As Investors Bet On More Rate Hikes

Topline

Stocks fell for a third day in a row on Tuesday as the recent summer market rally continues to fizzle out, with investors growing nervous about more big interest rate hikes from the Federal Reserve, which signaled last week that it would continue to tighten monetary policy for “some time” in an effort to bring down inflation.

Key Facts

The Dow Jones Industrial Average was down 1%, over 300 points, while the S&P 500 lost 1.1% and the tech-heavy Nasdaq Composite 1.1%.

Stocks have moved lower since Fed chair Jerome Powell’s Jackson Hole speech last Friday, in which he pledged the central bank will continue to aggressively hike rates “higher for longer” until inflation declines meaningfully.

Markets took a hit again on Tuesday after another central bank official warned that interest rate hikes would continue well into next year: New York Fed President John Williams called for more “restrictive policy to slow demand,” adding, “we’re still quite a ways from that.”

Investors should not be looking for “market salvation” from a Fed pivot anytime soon and “should expect the market regime of high volatility and range-bound trading to persist for a while,” writes Jason Draho, Head of Asset Allocation Americas at UBS Global Wealth Management.

Government bond yields also continued to surge higher as investors bet on more rate hikes, with the yield on the 2-year Treasury note hitting 3.46%, its highest level in almost 15 years.

Energy stocks, meanwhile, led the market declines on Tuesday as oil prices fell over 5%—their steepest decline in nearly a month, with U.S. benchmark West Texas Intermediate and international benchmark Brent crude now trading at $92 and $99 per barrel, respectively.

Crucial Quote:

Stocks are suffering heavy selling pressure “as buyers remain on the sidelines” following aggressive selling action last Friday, points out Vital Knowledge founder Adam Crisafulli. “After warning markets that the jobs market is still running too hot,” the big July number of 11.2 million job openings “isn’t going to make the Fed happy.”

What To Watch For:

Markets are widely pricing in a third consecutive rate hike of 75 basis points at the Fed’s next policy meeting in September, following similar increases in June and July. Investors appear to be adjusting to the new reality of more rate hikes for a longer period of time—and with a long way to go before a potential pivot in monetary policy, experts are warning that recession risks are rising and there is “little room” left for a soft landing. “Over the next few months, if the labor market doesn’t break and the consumer remains resilient, Wall Street might start pricing in rate hikes for February and March,” predicts Edward Moya, senior market analyst at Oanda.

Further Reading:

Market Experts Predict Further Volatility As Fed Rate Hikes Leave ‘Little Room’ For Soft Landing (Forbes)

Stock Market Selloff Continues As Investors Worry About Higher Interest Rates (Forbes)

Netflix Is Now The Worst-Performing Stock In The S&P 500 As Shares Plunge Over 60% In 2022 (Forbes)

Dow Falls Over 600 Points As Experts Warn Bear Market Rally Is ‘Grinding To A Halt’ (Forbes)

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