U.S. stock markets closed lower on Friday as market participants remained concerned regarding higher interest rate for a longer period. Record-high yields on U.S. government bonds significantly dented investors’ confidence on risky assets like equities. All three major stock indexes recorded fourth straight losing days. For the week too, these indexes ended in negative territory.
How Did The Benchmarks Perform?
The Dow Jones Industrial Average (DJI) down 0.3% or 106.58 points to close at 33,963.84 after a choppy session. Notably, 22 components of the 30-stock index ended in negative territory, while 8 in positive territory. At its intraday high, the blue-chip index was up nearly 86 points.
The tech-heavy Nasdaq Composite finished at 13,211.81, sliding 0.1% due to weak performance of large-cap technology stocks. At its intraday high, the tech-laden index was up nearly 129 points. The major loser of the index was Tesla Inc. TSLA. Shares of the EV giant tumbled 4.2%. Tesla currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The S&P 500 dropped 0.2% to end at 4,320.06. The broad-market index fell below the key support base of 100-day moving average on Sep 21 for the first time since March and continued to trade there. This indicates possibility of more decline for the index.
Nine out of 11 broad sectors of the benchmark ended in negative territory, while two finished in green. The Consumer Discretionary Select Sector SPDR (XLY), the Financials Select Sector SPDR (XLF) and the Real Estate Select Sector SPDR (XLRE) dropped 1%, 0.8% and 0.7%, respectively.
The fear-gauge CBOE Volatility Index (VIX) was down 1.9% to 17.20. A total of 9.47 billion shares were traded on Friday, lower than the last 20-session average of 10.09 billion. Decliners outnumbered decliners on the NYSE by a 1.12-to-1 ratio. On Nasdaq, a 1.29-to-1 ratio favored declining issues.
Fed Dampens Wall Street Sentiments
In its September FOMC meeting, the Fed kept the benchmark lending rate unchanged at the existing 5.25-5.5%, as stated on Sep 20. However, the post-FOMC statement of Fed Chairman Jerome Powell dampened market participants’ sentiments.
Although the Fed paused its rate hike in the September FOMC meeting, the current dot-plot has shown a strong likelihood of one more hike of 25 basis points in 2023. That will take the terminal interest rate of this hiking cycle to 5.6%, well above the 5.1% forecast in June. Notably, the current range of the Fed fund rate is the highest level since March 2001.
More importantly, the central bank said it would keep interest rates higher for a longer time period. The new projection has shown two maximum rate cuts in 2024 instead of four projected in June. The first cut in interest rate is not expected before September 2024.
Soaring Yields on Sovereign Bonds
Following the post-FOMC statement of Jerome Powell, the yield on the short-term 2-Year U.S. Treasury Note reached 5.441%, its highest level since 2006. This link is closely linked to the possibility of a near-term economic downturn. The yield on the benchmark 10-Year U.S. Treasury Note touched 4.494%, its highest level since 2007.
Higher interest rate is detrimental to stock investing. It will hike the discount rate thereby reducing the net present value of investment from equities. Moreover, growth-oriented large-cap companies as well as entire small and mid-cap space are heavily dependent on chip source of credit. Therefore, higher interest rate is likely to slow the U.S. economic growth.
Last week was a disappointing one for Wall Street. The Dow, the S&P 500 and the Nasdaq Composite sild 1.9%, 2.9% and 3.6%, respectively. The S&P 500 and the Nasdaq Composite posted three consecutive weeks of decline. Moreover, both indexes registered their worst weekly performance since March.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report