U.S. stocks trade sharply lower on Tuesday, but were off session lows in the final hour of trade, as downbeat guidance from major retailers, rising Treasury yields and economic data added to worries that the Federal Reserve may need to lift interest rates higher and hold them there for longer to tame price pressures.
The Dow rose Friday, but logged a third straight weekly decline, while the S&P 500 saw a 0.3% weekly fall, its second straight decline. The Nasdaq Composite rose 0.6% last week. U.S. markets were closed Monday for the Presidents Day holiday.
What’s driving markets
Investors returned from the long weekend on Tuesday in a downbeat mood as the Fed’s expectations on higher terminal rates continued to rattle stock-market investors, putting the S&P 500 and the Dow industrials on pace for their worst daily percentage declines since they closed 2.5% and 2.3% lower, respectively, on Dec. 15, according to FactSet data.
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Last week, a flurry of hotter-than-expected inflation reports and commentary from Federal Reserve officials spurred investors to bet on more interest-rate hikes by the central bank. Fed funds futures traders are pricing in a 76% probability that the Fed will raise interest rates by a quarter-of-a percentage-point to between 4.75% to 5% on March 22, followed by another 25-basis-point hike in May, according to the CME FedWatch tool.
Meanwhile, traders continued to nudge up expectations for the peak in the fed-funds rate, with a few traders now penciling in a peak near 6%. Overall, traders have only recently come around to the Fed’s expectation for the fed-funds rate to peak just above 5%.
“While the stock market has staged an impressive rebound so far this year, markets are still trying to adjust to the reality that the Fed 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,” said Carol Schleif, chief investment officer at BMO Family Office in Minneapolis.
“Wednesday’s FOMC minutes report is bound to reveal a closer look into the Fed’s thinking, especially given the recently released inflation and jobs numbers, which are still elevated and illustrative of a hot economy,” she said.
Minutes of the Fed’s Jan. 31-Feb. 1 meeting will be published on Wednesday 2 p.m. Eastern.
See: Why the stock market isn’t as forward-looking as investors might think when it comes to a recession
The broad risk-on rally “has slowed to a crawl,” even though the higher terminal rates haven’t “moved through assets like a wrecking ball as some had assumed,” said Stephen Innes, managing partner at SPI Asset Management.
“But there remains a heightened degree of caution due to the steep rise in U.S. yields and rate volatility, an environment where the U.S. dollar tends to benefit,” Innes added.
Read: Investors have pushed stocks into the death zone, warns Morgan Stanley’s Mike Wilson
On Tuesday, yields for the 2-year Treasury note
TMUBMUSD02Y,
were coming close to the highest point in 15 years, jumping to 4.73%. The yield on the 10-year Treasury advanced to 3.95%.
“Equities are responding negatively to higher yields which raise the cost of capital for businesses and also illustrate that investors increasingly believe the Fed’s rate hiking may be more aggressive than previously anticipated,” said José Torres, senior economist at Interactive Brokers.
See: Biden vows Russia will ‘never’ win war against Ukraine
Tensions over Russia’s invasion of Ukraine as the first anniversary of the war approaches also added to the market anxiety. U.S. president Joe Biden visits Poland on Tuesday and seeks to consult with allies from NATO’s eastern flank, after paying an unannounced visit to Kyiv on Monday.
Meanwhile, Chinese president Xi Jinping plans a visit to Moscow for a summit with Vladimir Putin in the coming months. Wang Yi, the country’s top diplomat, is scheduled to visit Moscow this week.
Jonathan Krinsky, chief technical strategist at BTIG, noted that the latest stock-market rally had nevertheless begun to fade.
“After a few weeks of chopping around, the SPX looks to have broken its short-term uptrend just as momentum has begun to roll over, similar to breaks we saw in April, August, and December of 2022,” Krinsky wrote in a note to clients.
“As a reminder, the back half of February is often one of the weaker parts of the calendar. This has come on the heels of rates which have been moving higher for the last couple of weeks. A slow equity reaction to rates has not been atypical over the last 18-months, as each of the prior six tactical peaks all occurred one to four weeks after the low in rates,” he added.
U.S. economic updates on Tuesday include the S&P flash services, which rose to a 8-month high in February, at 50.5 up from 46.8 in the prior month. The U.S. manufacturing PMI climbed to the four-month high of 47.8, up from 46.9.
While both are increases, any number below 50 points to a potentially shrinking economy.
Still, the improving PMI numbers feed into the growing market realization of rising interest rates, noted Peter Boockvar, Bleakley Advisory Group’s chief investment officer.
Existing-home sales dropped to the lowest point in a decade, Tuesday data showed. January’s 0.7% decline is the 12th straight monthly decline, according to the National Association of Realtors figures.
Companies in focus
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Walmart Inc.
WMT,
+0.61%
shares were up 0.5% after the retail giant reported its fourth-quarter earnings and offered its forward guidance. The company beat estimates on earnings and sales, but also offered guidance on the first quarter and the full fiscal year 2024 that fell short of expectations. -
Home Depot Inc.
HD,
-7.06%
shares fell 6.5% after fourth-quarter results from the home improvement chain. While posting a beat on profit during the quarter, sales missed expectations and the company’s downbeat forward guidance cited continuing challenges with inflation, labor markets and supply chains. -
Shares of Meta Platforms Inc.
META,
-0.46%
fell 0.2% after the parent company of Facebook and Instagram said it is testing a paid subscription tier to verify accounts. -
Shares of the medical device maker, Medtronic PLC
MDT,
+0.81% ,
are trading 0.6% higher after earnings results for its fiscal third quarter. Sales and adjusted earnings-per share beat estimates and the company changed its fourth-quarter guidance on earnings per share to $5.28 to $5.30, versus prior guidance of $5.25 to $5.30.
Movers & Shakers: Home Depot and Walmart slip after earnings guidance; Facebook parent Meta rises on trial of subscription tier
—Jamie Chisholm contributed reporting to this article.
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