U.S. stock indexes fell Tuesday and bond yields hit two-year highs, as investors fretted over whether the Federal Reserve will raise interest rates more quickly and aggressively than expected.
Investors, coming off a holiday weekend that had closed markets on Monday, sold stocks and bonds across the board. All three indexes fell, with the S&P 500 sliding 1.3% and the Dow Jones Industrial Average shedding 1.1%. The Nasdaq Composite retreated 1.8%, leaving it close to entering a correction, or a drawdown of 10% or more from a recent closing high.
Meanwhile, the yield on the benchmark 10-year Treasury note ticked up to 1.847%—its highest level in two years—from 1.771% Friday. Yields rise when bond prices fall.
Stocks and bonds have been in a tumultuous state since the year’s start. All three stock benchmarks are down at least 2.5% so far in 2022. At issue is how much and how quickly the Fed will act in an effort to tame rampant inflation, with investors increasingly convinced that the central bank will act more forcefully.
Interest-rate futures markets indicate investors are now betting on four to five interest rate rises this year, up from three to four Friday, according to
“Markets are still trying to find a level for rate increases. It was only in October the market was expecting one rate hike for 2022 and now it’s expecting four,” said
Edward Park,
chief investment officer at U.K. investment firm Brooks Macdonald. “That’s reflecting the level of uncertainty we have in the market right now about the path of Fed policy.”
Some of the harshest selling has been focused on high-growth stocks whose earnings will look less attractive in a rising-rate environment. Fund managers surveyed by Bank of America’s research team in recent weeks found that many cut their exposure to tech, pushing allocations to the sector to their lowest point since 2008.
That played out further Tuesday. Shares of tech and communication services stocks fell 2.1% and 1.7%, respectively.
Facebook’s parent, fell more than 3%.
and
fell over 2%. Overall, tech stocks are down 6.7% so far this year, the second-worst-performing sector of the S&P 500.
“We’re experiencing a withdrawal of liquidity, and that’s really spooking the market,” said
Jack Janasiewicz,
a portfolio manager and lead portfolio strategist at Natixis Investment Managers Solutions.
The Cboe Volatility Index—Wall Street’s so-called fear gauge, also known as the VIX—ticked up to 22.90, its highest level in a month. “The uncertainty around the timing and pace of the [Fed’s] action will likely keep markets on edge for the first…
Read More: Stocks Fall as Bond Yields Hit Two-Year High