On Tuesday, the U.S. stock market experienced a modest decline due to rising Treasury yields, which kept pressure on the rate-sensitive Nasdaq Composite Index. The Dow Jones Industrial Average, or DJIA, dropped roughly 37 points, or 0.1%, to end around 32,394. Similarly, the S&P 500 index decreased by 0.2%, while the Nasdaq COMP closed the day 0.5% lower, according to preliminary data from FactSet. Despite the downward trend, stocks ended above the session lows.
One overarching factor of the decline was the 2-year Treasury rate, which climbed 10.5 basis points to 4.06%. Bond yields and prices move in the opposite direction, so higher yields lead to lower bond prices, causing stocks to decrease as well. This risk-on sentiment caused investors to sell tech stocks in particular, which led to the Nasdaq’s weaker performance, because they felt that the rate hike would make future technology investments less appealing with fewer returns.
Despite the drop in the stock market, there was a raft of relatively upbeat economic data that was released. For example, the National Association of Home Builders reported that homebuilder sentiment hit a 12-year high in March. Additionally, housing starts rose 10.2% month-over-month, which is the biggest gain since 2006. Lastly, industrial production for February saw a 0.7% increase, beating Wall Street estimates.
Some traders’ expectations for the fed-funds rate, which is the Federal Reserve’s benchmark interest rate, were raised. This rate is used to determine the interest rate that banks charge each other for overnight loans, and it can also influence borrowing rates for consumers and businesses. Higher rates could mean borrowing more expensive, which could slow down economic growth. However, the Fed may have no other choice but to raise the rate because inflation has been increasing faster than anticipated.
In sum, the stock market drop was mainly due to uncertainties in the bond market and investors’ fears of a future rate hike. However, despite the decline, the overall sentiment seems bullish due to the robust economic data that was released. The question remains whether immediate rate hikes or future growth will weigh more heavily on investors’ minds in the coming weeks.