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Dow dives 697 points as bond yields jump on concerns the Fed will keep raising rates

Feb 22, 2023, 03:58 IST
Business Insider
(Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)
  • US stocks dropped Tuesday as investors fret that the Fed will keep rates elevated.
  • Investors will parse minutes from the Fed's February meeting on Wednesday.
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Stocks plunged Tuesday, continuing to pare gains for the year as investors worry sticky inflation will convince the Federal Reserve to keep interest rates at high levels compared with zero less than a year ago.

The S&P 500 finished with its third straight loss. All 11 sectors of the index finished lower. Consumer discretionary stocks performed the worst after Monday's Presidents' Day holiday. The index marked a second weekly loss last week, stung after regional Fed presidents Loretta Mester and James Bullard said more interest rate hikes may be needed to tame still-hot inflation. Their comments also raised questions about a potential increase of 50 basis points in the Fed funds rate at the central bank's upcoming

With the potential of the Fed funds rate moving even higher, investors have been selling off bonds, pushing yields higher and chopping down stocks. The 2-year yield pushed past 4.7% and was approaching its highest since 2007. Minutes from the Fed's meeting in February are due Wednesday and the Fed's preferred inflation gauge, the PCE, is due Friday.

Investors were also considering a warning from Morgan Stanley's Mike Wilson that stocks could crash by 26% over the coming months after surging to unsustainable highs. Bank of America has also sounded the alarm on investors potentially wiping out the S&P 500's 2023 gain by early March.

Here's where US indexes stood at the 4:00 p.m. closing bell on Tuesday:

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"While the stock market has staged an impressive rebound so far this year, markets are still trying to adjust to the reality that the Federal Reserve is unlikely to pivot and is instead still focused on fighting inflation, which suggests that investors should be prepared for interest rates to stay higher for longer," Carol Schleif, chief investment officer at BMO Family Office, said in a note Tuesday.

"Even with the Federal Reserve's multiple interest rate hikes over the past year, the economy and the labor market are holding up exceptionally well, which supports our view that a soft landing is not only possible, but probable. Stock market returns in 2023 are likely to be much better than they were in 2022 and more like historical averages," she said.

Investors on Tuesday received downbeat outlooks from retailers Walmart and Home Depot. Walmart's earnings beat Wall Street's expectations for its holiday quarter, but the company warned softer spending by consumers could hurt its profit margins. Home Depot shares finished lower while Walmart shares swung higher.

Here's what else is happening today:

In commodities, bonds, and crypto:

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