Dow Comes Back to Earth

U.S. stocks dropped sharply, hit by worries over rising bond yields, new competition in the health-care sector and rising oil production. The declines were broad-based, hitting shares of everything from energy to financial companies and spooking investors, who have pushed U.S. stocks to a repeated string of records since the 2016 election. 

The Dow Jones Industrial Average declined 362.59 points, or 1.4%, to 26076.89, its worst day since May, while the S&P 500 dropped 31.10 points, or 1.1%, to 2822.43, its largest percentage drop since August. Tuesday’s declines mark the first time this year that both indexes have fallen for two consecutive days. The Nasdaq Composite Index fell 64.02 points, or 0.9%, to 7402.48.

“We’ve had a unilateral move higher [in stocks] to start things off and people are realizing this is not sustainable,” said Art Hogan, chief market strategist at B. Riley FBR. “You’re also seeing some cracks in the global story with interest rates rising.”

The Dow fell 177 points on Monday, on the back of a rise in the 10-year treasury yield, raising concerns that higher interest rates could douse the bull market. The Dow, along with the S&P 500, posted its worst decline of the year on Monday.

Long-dated Treasury yields climbed further on Tuesday, with the U.S. 10-year Treasury yield trading near levels not seen since 2014, amid fears of higher inflation. The benchmark yield started the year trading around 2.4 percent. Higher inflation could also lead central banks to tighten monetary policy faster than the market expects. Last week, Stifel strategist Barry Bannister predicted the Federal Reserve will cause a correction this quarter as it leads other central banks into tighter monetary policy. The Fed kicked off its latest two-day monetary policy meeting on Tuesday. Market expectations for a rate hike are just 5.2 percent, according to the CME Group’s Fed Watch tool.

But Robert Pavlik, chief investment strategist at SlateStone Wealth, said he does not think this is the start of a major pullback. “I think people are looking for an excuse to sell,” he said. “This is the first wave of selling we’ve seen in a while.” Pavlik added this selling pressure could present a buying opportunity for investors who have cash on the sidelines.

 

Keep those stops tight

Todd “Bubba” Horwitz