Stocks closed lower and Treasury yields rose on Friday, with much of Wall Street anticipating that the Federal Reserve will raise interest rates as early as March despite a mixed report in the US jobs market.
The pessimistic ending capped the worst week for the S&P 500 tech sector since October 2020 and the biggest weekly drop for the high-tech Nasdaq in nearly a year.
The S&P 500 fell 0.4%, and the 10-year Treasury yield hit its highest level since COVID-19 started hitting markets in early 2020. The benchmark had risen by 0. 3% at the start, then fell as much. to 0.7 percent on the mixed reading from the US Department of Labor, which is typically the most anticipated economic data each month.
Employers added only about half the number of jobs last month that economists expected, which looks negative for the economy. But average wages have risen more than expected for workers. Overall, many investors saw this as proof that the job market is strong enough for the Federal Reserve to continue pushing for interest rates to rise faster from their all-time low.
“Does this bring the Fed to the table in March or June? Said Megan Horneman, Director of Portfolio Strategy at Verdence Capital Advisors. “It’s a moot point, long term. They will increase rates in 2022.
Higher rates could help stem the high inflation sweeping the world, but they would also end the conditions that have put financial markets in “easy mode” for many investors since early 2020. Higher rates do stocks as well. in high-tech companies. and other less attractive expensive growth stocks, which is why the S&P 500 tech sector suffered the brunt of the selloff this week as bond yields rose.
Immediately after the report was released, Treasury yields continued to rise sharply this week as expectations rose for the Fed to raise rates faster. The 10-year Treasury yield hit 1.77%, from 1.73% Thursday night. This is its highest closing point since mid-January 2020, according to Tradeweb.
Investors are now banking on a greater than 79% chance that the Fed will hike short-term rates in March. A month ago, they saw a less than 39% chance of this happening, according to CME Group.
“The shortfall (on job additions) was not large enough to change any of the Fed’s plans for the tightening cycle,” said Cliff Hodge, chief investment officer for Cornerstone Wealth.
Brian Jacobsen, senior investment strategist at Allspring Global Investments, said hourly wages for leisure and hospitality workers rose 14% from the previous year. This is a big step forward for a group that represents about one in eight workers in the private sector.
“This is a solid report,” Jacobsen said, “and probably confirms for the Fed” that it should stay focused more on raising rates than continuing to pump massive amounts of aid into the economy.
Record rates have been one of the main reasons for the stock market’s race to record highs since the start of the pandemic. When bonds earn little interest, people are willing to pay higher prices for stocks and other investments.
This is why any potential rate hike increases nervousness, although the Fed has clearly telegraphed that it could hike rates three times in 2022. It has already slowed down the monthly bond purchases it makes to lower rates. of long-term interest, and the minutes released this week from its last meeting showed that the Fed could pull such purchases off its balance sheet faster this time around.
Friday’s pullback marked the fourth consecutive decline in the S&P 500. It ended down 19.02 points to 4,677.03, about 2.5% below the all-time high set on Monday.
The Dow Jones Industrial Average lost 4.81 points, or less than 0.1%, to 36,231.66, after fluctuating between a gain of 146 points and a loss of 124. The Nasdaq Composite lost 144.96 points , or 1%, at 14,935.90. The major indices all posted weekly losses, although the weekly Nasdaq drop was the largest since late February.
The Nasdaq has more tech stocks than other indexes, and these companies tend to be more affected by rising interest rates. This is the flip side of the advantage they had during much of the pandemic, when low rates pushed investors to pay higher prices for companies able to grow no matter how strong the market was. economy. The low rates have also made investors more willing to buy companies whose expected big profits could take years to materialize.
Small business stocks fell more than the broader market. The Russell 2000 Index fell 26.56 points, or 1.2 percent, to 2,179.81.
Tesla fell 3.5% and Nvidia slipped 3.3%. Both were among the heaviest weights in the S&P 500.