All three major U.S. stock indexes fell by over one percent Tuesday amid declining risk sentiment as the market expected prolonged high interest rates.
The Dow Jones Industrial Average (DJI) fell by 388.00 points, or 1.14 percent, closing at 33,618.88. The S&P 500 (SPX) lost 63.91 points, or 1.47 percent, finishing at 4,273.53. Meanwhile, the Nasdaq Composite (IXIC) dropped 207.71 points, or 1.57 percent, closing at 13,063.61.
All 11 S&P 500 sectors ended the day in the red. The technology sector (SPLRCT) experienced the most significant decline of 1.8 percent, while sectors sensitive to interest rates, like utilities (SPLRCU) and real estate (SPLRCR), fell by 3.05 percent and 1.8 percent, respectively.
The Cboe Volatility Index (VIX), measuring market fear, reached its highest level since late May. The MSCI All Country World Index, which gauges global equities, saw its eighth consecutive day of decline, matching a decade-long losing streak.
Quincy Krosby, chief global strategist for LPL Financial, said the market was filled with uncertainty, with selloffs being relatively orderly but still causing concern. He said the financial market was “in the hands of the bears” at the moment.
Brad McMillan, chief investment officer at Commonwealth Financial Network, noted that investors were still adapting to higher interest rates.
“What you are getting is increasingly a sense that the market is overvalued. ... There’s a real sense out there that this isn’t sustainable, and buyers are being scared away,” McMillan said.
Paul Nolte, a senior wealth manager at Murphy & Sylvest Wealth Management, mentioned that investors realize that interest rates are likely to stay higher for an extended period and are slowly getting used to this idea.
This perspective aligns with the Federal Reserve’s message of keeping rates elevated for a prolonged time, a sentiment that has recently gained more market acceptance.
Minneapolis Fed President Neel Kashkari mentioned that a “soft landing” for the U.S. economy is probable. However, he also emphasized a 40 percent chance the Fed would have to significantly increase interest rates to combat inflation.
Dollar surges to 10-month high
The U.S. dollar extended its fifth consecutive day of gains, hitting a 10-month high on Tuesday. This rise is linked to 10-year U.S. government bond yields surging to levels not seen in 16 years due to strong economic data despite higher interest rates.
The dollar index reached 106.21, its highest point since November 30, with a 0.26 percent increase. On the other hand, the euro dropped 0.23 percent to $1.0567, its lowest value since March 16.
Adam Button, chief currency analyst at ForexLive, pointed out that in September, the key focus was the surge in Treasury yields and how it had influenced the currency market.
“The story of September has been the jump in Treasury yields and the spillovers into the currency market,” said Button. “The market has expected the economic data to deteriorate and it hasn’t.”
Argente head of F.X. analysis Joe Tuckey described the robust U.S. data as exceptional and compared the dollar to a powerful force, describing the greenback as an “unstoppable steamroller.”
Data from Tuesday showed that new U.S. single-family home sales in August were below expectations. During the same period, the interest rate for the widely used 30-year fixed mortgage exceeded seven percent. Analysts noted a notable acceleration in annual home price growth in the U.S. for the second consecutive month, this time in July.