Wall Street slipped again after a stronger-than-expected report on the U.S. economy weakened hopes that easier interest rates would arrive soon. The S&P 500 fell 0.6% Wednesday, its second straight drop. The Dow fell 0.3%, and the Nasdaq composite lost 0.6%.
Rising yields in the bond market again put downward pressure on stocks. Yields climbed after a report showed sales at U.S. retailers were stronger last month than economists expected, which could keep upward pressure on inflation. That could push the Federal Reserve to wait longer than traders expect to begin cutting rates.
Higher yields hurt all kinds of investments, and high-growth stocks tend to be some of the hardest hit. Drops of about 1% or more for Tesla, Apple and Amazon were some of the heaviest weights on the S&P 500. The smaller stocks in the Russell 2000 index also slumped more than the rest of the market, down 1.1%.
The Dow Jones Industrial Average, meanwhile, has less of an emphasis on tech and high-growth companies. That helped limit its losses relative to the rest of the market.
The yield on the two-year Treasury, which more closely tracks expectations for the Fed, also jumped. It climbed to 4.36% from 4.22% late Tuesday as traders trimmed their expectations for the Fed’s first rate cut to arrive in March. Traders are now betting on a 55% probability of that, down from a shade more than 70% a month earlier, according to data from CME Group.
A top Fed official, Gov. Christopher Waller, said Tuesday that the central bank could take its time before its next move on rates given how resilient the economy has remained.
“These comments leave a rate cut as early as March on the table but also indicate that such a move is not a done deal,” according to economists at Deutsche Bank led by Amy Yang.
On Wednesday, across the Atlantic Ocean, the head of the European Central Bank warned in a speech about the risks of cutting rates too soon.
If Wall Street’s predictions for the timing of the rate cuts it desires so much do indeed prove wrong, it would be just the latest example of overzealousness by traders.
Interest rates are one of the main levers that set stock prices. The other is corporate profits, and several companies reported weaker results on Wednesday than analysts expected.
U.S. Bancorp dropped 2.6% after reporting weaker profit than analysts expected. Big 5 Sporting Goods fell 7.8% after its said it expects to report a worse loss for the last three months of 2023 than earlier expected because of weak sales of winter-related products. It said it's been hurt by warmer temperatures and a lack of snowfall in the West.
Charles Schwab reported stronger profit for the latest quarter than analysts expected. But its stock still fell 1.8%. Its revenue fell short of estimates, and analysts said its better-than-expected earnings were likely due in part to easier tax rates.
Spirit Airlines was under heavy pressure again and sank 24.2%. Its stock nearly halved a day before after a U.S. judge blocked its purchase by JetBlue Airways out of fear that it would lead to higher airfares. JetBlue lost 8.3%.
Wednesday’s slump for Wall Street followed a rough day for financial markets worldwide. Stock indexes fell more than 1% in Europe following the comments by Christine Lagarde, the head of the European Central Bank.
They dropped even more sharply in Asia. Stocks sank 3.7% in Hong Kong and 2.1% in Shanghai as worries continue about a sluggish recovery for the world’s second-largest economy.
Japan’s Nikkei 225, which has been one of the new year’s biggest winners, also fell and slipped 0.4%.
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