Stocks Tumble on Surging Treasury Yields

Published as of: September 21, 2023, 5:00 p.m. ET 

(Thursday market close) Surging Treasury yields pushed U.S. equities into their third day of losses Thursday, as investors' concerns about high interest rates and recession remained in the driver's seat a day after the Federal Reserve signaled another rate increase may be necessary this year. The S&P 500^® Index (SPX) and Nasdaq Composite (COMP) were both near lows not seen since June.

The 10-year Treasury note yield (TNX) was near a 16-year high of just under 4.50% Thursday. Other Treasury benchmarks also touched multi-year highs, while crude oil prices hovered near 10-month highs.

Rising yields "are definitely the driver" behind the market's weakness, says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "But investors are also nervous over higher oil prices and the stronger dollar. All of those are net-negatives for stocks."

Here is where the major benchmarks ended:

• The S&P 500 Index was down 72.20 points (1.6%) at 4,330.00; the Dow Jones Industrial Average (DJIA) was down 370.46 points (1.1%) at 34,070.42; the Nasdaq Composite (COMP) was down 245.14 points (1.8%) at 13,223.98.
• The 10-year Treasury note yield (TNX) was up about 14 basis points at 4.49%.
• Cboe's Volatility Index (VIX) was up 2.40 at 17.54.

Recession or interest rate concerns weighed particularly heavily on sectors viewed as having greater exposure to those factors. Shares of real estate, consumer discretionary, and financial companies were among the market's poorest-performing sectors Thursday, with the KBW Regional Banking Index (KRX) sinking to an 11-week low. The outlook for higher-for-longer interest rates helped lift the U.S. Dollar Index (DXY) to a 6½-month high, though it faded later.

The following companies had stock price moves driven by quarterly earnings, analyst ratings, or other news:

• Cisco Systems (CSCO) shares fell nearly 4% after the company said it would buy Splunk (SPLK), a cybersecurity software company, for $157 per share in a cash deal worth about $28 billion. Splunk shares soared 21%.
• Darden Restaurants (CRI) shares fell 1.8% after reporting same-store sales at its fine-dining restaurants dropped 2.8% from the same quarter last year. The company, which owns the Olive Garden chain, reported other results that surpassed expectations.
• Eli Lilly (LLY) shares fell 4.6% following reports the company had sued several U.S. clinics and pharmacies for allegedly selling cheaper, unauthorized versions of the company's diabetes drug Mounjaro.
• FedEx (FDX) rose 4.8% after reporting quarterly earnings the beat expectations, though revenue fell slightly short of forecasts.
• Fox Corporation (FOX) was up 2.6%, while News Corp. (NWSA) gained 1.7% following reports Rupert Murdoch would step down as chairman of both companies.
• Goldman Sachs (GS) fell 1.7% after Citi lowered its price target for the stock to $380 from $400, while keeping a "neutral" rating. Citi noted a "challenging market environment," including weakness in real estate, that may burden Goldman's earnings.
• KB Home (KBH) fell 3.2% after the homebuilder said it expected its housing gross margin to shrink in the current quarter. Its other quarterly results were above expectations.
• Paramount Global (PARA) shares rose 1% following reports that the Writers Guild of America strike could be near an end. Fellow content streamer Walt Disney (DIS) was up 0.3%.

Thursday's weakness is a continuation of the wobbles that set in as the Fed policy meeting wrapped up Wednesday afternoon, indicating investors may have had to recalibrate their outlooks for the economy and rates.

The Fed held its benchmark funds range target unchanged at 5.25% to 5.50%, as expected. But in a post-meeting press conference, Fed chair Jerome Powell noted that because inflation remains above the Fed's 2% long-term target, the central bank would be "prepared to raise rates further, if appropriate."

Additionally, the Fed's updated "dot-plot" projection for the path of rates included one more hike this year and effectively removed two cuts from 2024, disappointing investors who'd been hoping for multiple cuts next year.

"The overriding message from the Fed is that it will continue to keep rates high until inflation comes down," says Kathy Jones, chief fixed income strategist at Schwab. "This 'higher for longer' message reflects a high level of uncertainty at the Fed about what it will take to move inflation sustainably lower."

Setting aside the weakness in equities, though, the market still appears confident the Fed will hold off on further rate hikes beyond this month. Late Thursday, investors were pricing in a 74% implied probability the Fed will hold rates at the current level following its next policy meeting, which ends November 1, based on the CME FedWatch Tool. That's up from 70% Tuesday and 63% a week ago.

Economic updates Thursday were mixed. Weekly initial jobless claims fell last week to a seasonally-adjusted 201,000, about 24,000 under expectations. That is the lowest weekly figure since January and an indication the labor market remains strong.

By contrast, the Conference Board's Leading Economic Index (LEI) fell 0.4 to 105.4 in August, meeting expectations but marking the reading's 17^th consecutive monthly decline. The LEI's extended slide is the longest since the run-up to the 2007–09 Great Recession.

The LEI indicates the economy "is heading into a challenging growth period and possible recession over the next year," Conference Board economist Justyna Zabinska-La Monica said in a statement. The recent declines reflect weakness in new orders, deteriorating consumer expectations for business conditions, high interest rates and tight credit conditions.

"All these factors suggest that going forward, economic activity probably will decelerate and experience a brief but mild contraction," she said. The Conference Board forecasts real GDP will grow 2.2% in 2023 before decelerating to a 0.8% rate in 2024.