U.S. stocks closed sharply lower on Thursday as yields on government bonds hits a record high for the second successive day dampening investors’ enthusiasm for risky assets like equities. All three major stock indexes ended in the red due to a broad-based market decline.
The Dow Jones Industrial Average (DJI) closed at 26,627.48, declining 0.8% or 200.91 points. The S&P 500 Index (INX) decreased 0.8% to close at 2,901.61. The Nasdaq Composite Index (IXIC) closed at 7,879.51, shedding 1.8% or 145.57 points. Decliners outnumbered advancers on the NYSE by 3.98-to-1 ratio. On the Nasdaq, decliners had an edge over advancers by 3.55-to-1 ratio. Across U.S. stock markets, a total of 831 stocks touched 52-week low and 92 stocks touched 52-week high. The CBOE VIX increased 22.5% to close at 14.22 after hitting intraday high of 15.84, its highest level since early July.
How Did the Benchmarks Perform?
The Dow ended in negative territory after five straight closed in the green. The index did recover partially from an intraday low of a loss of 357 points and finally shed 200.91 points. Notably, point-wise, this was the blue-chip index’s largest decline since Jul 11 and highest percentage drop since Aug 10. Meanwhile, 24 components of the 30-stock index finished in the red while six ended in the green.
The S&P 500’s fall was led by a decrease of 1.8% in the Technology Select Sector SPDR (XLK), 1.5% drop in Consumer Discretionary Select Sector SPDR (XLY), a1.4% loss in Communication Services Select Sector SPDR (XLC) and a 1% decline in Health Care Select Sector SPDR (XLV). The benchmark index witnessed its stiffest decline in a single-day since Jun 25. Notably, nine out of 11 sectors of the broad-market index finished in negative territory while two closed in the black.
The tech-laden Nasdaq Composite finished in the red reversing its previous day’s gains due to poor showing by FAANG stocks. Thursday’s loss was the biggest single-day drop for the tech-heavy index since Jun 25.
Rising Yields on Government Bonds Result in Broad Market Decline
The yields on 10-year U.S. Treasury Note and 30-year U.S. Treasury Note, which hit record highs on Wednesday, increased further on Thursday. The 10-year Treasury Note yield touched 3.232% to reach a new high in seven years breaking Wednesday’s record of 3.166%. Likewise, the yield on 30-year Treasury Note yield touched 3.346% to reach a new high in four years breaking Wednesday’s record of 3.327%.
Recently released economic reports have indicated robustness of the economic fundamentals. Data on manufacturing, services, industrial production, capacity utilization, U.S. consumer sentiment and confidence index, strong government and private sector recruitment have restored investors’ faith in riskier assets like equities reducing the popularity of bonds.
However, surge in government bond yields over two successive days have dented investors’ risk appetite. Higher interest rate will raise the cost of funds to invest in risky assets like equities. Instead investors may be better off investing money in risk-free government securities. Additionally, on Oct 3, Jerome Powell, Chairman of Federal Reserve stated that the country has to go a long way for interest rate to hit neutral, a clear indication of further rate hikes.
Consequently, rate-sensitive high dividend paying stocks like The Procter & Gamble Co. (PG - Free Report) , International Business Machines Corp. (IBM - Free Report) and Microsoft Corp. (MSFT - Free Report) declined 1.3%, 1.3% and 2.1%, respectively. Microsoft carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
On Oct 4, the Department of Commerce reported that new orders for U.S. factory made goods in August rose 2.3%, marking its highest gain since September 2017. The figure also surpassed the consensus estimate of a rise of 1.8%, buoyed by strong demand for aircraft. Notably, July’s reading was revised upward from a drop of 0.8% to a decline of 0.5%. Year over year, factory orders increased 8.6% in August.
The Department of Labor reported that jobless claims for state unemployment benefits decreased 8,000 to a seasonally adjusted level of 207,000 for the week ended Sep. 29. The reading was better than the consensus estimate of 214,000 and currently stands at near 49-year low.
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