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| Stocks Plunge, as Fresh Tensions With China Batter Tech Shares | |
| (35 minutes later) | |
| Stocks suffered their steepest drop in eight months on Wednesday, as investors continued to digest rising interest rates and previously high-flying tech shares tumbled amid growing tensions with China. | Stocks suffered their steepest drop in eight months on Wednesday, as investors continued to digest rising interest rates and previously high-flying tech shares tumbled amid growing tensions with China. |
| The Standard & Poor’s 500-stock index dropped 3.3 percent, bringing the broad equity benchmark down 4.4 percent for the month. The yield on the 10-year Treasury note, a key measure of borrowing costs, inched up to more than 3.24 percent during the trading day before declining. | The Standard & Poor’s 500-stock index dropped 3.3 percent, bringing the broad equity benchmark down 4.4 percent for the month. The yield on the 10-year Treasury note, a key measure of borrowing costs, inched up to more than 3.24 percent during the trading day before declining. |
| Wednesday’s tumble marked the fifth-consecutive daily decline for the S. & P. 500, the longest string of down days since November 2016, according to research from Bespoke Investment Group. And the day’s drop was the sharpest since a market sell-off in February. | Wednesday’s tumble marked the fifth-consecutive daily decline for the S. & P. 500, the longest string of down days since November 2016, according to research from Bespoke Investment Group. And the day’s drop was the sharpest since a market sell-off in February. |
| Then, like now, concerns about nascent inflation, rising interest rates and the potential for the Federal Reserve to tighten monetary policy drove the selling. | Then, like now, concerns about nascent inflation, rising interest rates and the potential for the Federal Reserve to tighten monetary policy drove the selling. |
| The recent rise in bond yields — which are now at levels last seen in 2011 — has again become a key concern for stock market investors. | The recent rise in bond yields — which are now at levels last seen in 2011 — has again become a key concern for stock market investors. |
| Rising bond yields are something of a double-edged sword. They reflect the strength of the American economy, where unemployment is at 49-year lows. But the yields also serve as a baseline for key borrowing costs, including those for home mortgages. | Rising bond yields are something of a double-edged sword. They reflect the strength of the American economy, where unemployment is at 49-year lows. But the yields also serve as a baseline for key borrowing costs, including those for home mortgages. |
| “Stock markets like rising interest rates because they tend to signal a strong economic backdrop,” said Jonathan Golub, chief U.S. equity strategist for Credit Suisse. “That said, stock markets do not like very abrupt, large moves.” | “Stock markets like rising interest rates because they tend to signal a strong economic backdrop,” said Jonathan Golub, chief U.S. equity strategist for Credit Suisse. “That said, stock markets do not like very abrupt, large moves.” |
| Some interest rate-sensitive areas of the market have suffered steep drops along with the upward move in borrowing costs. The rise in interest rates has pushed conventional 30-year mortgage rates toward 5 percent, hurting both home affordability and the share price of home builders. | Some interest rate-sensitive areas of the market have suffered steep drops along with the upward move in borrowing costs. The rise in interest rates has pushed conventional 30-year mortgage rates toward 5 percent, hurting both home affordability and the share price of home builders. |
| Shares of home builders in the S. & P. 500 are down more than 7 percent this month. And so far this year, home-building stocks are down more than 25 percent. | Shares of home builders in the S. & P. 500 are down more than 7 percent this month. And so far this year, home-building stocks are down more than 25 percent. |
| But besides rising interest rates, other worries continue dog investors who have ridden the nearly decade-long bull market in stocks. | But besides rising interest rates, other worries continue dog investors who have ridden the nearly decade-long bull market in stocks. |
| The tech-heavy Nasdaq Composite index, which was one of the best performing financial assets earlier this year rising more than 16 percent through September. The Nasdaq tumbled 4 percent Wednesday, and is down 7.8 percent in October, with some stocks that had been sterling performers now lagging badly. Online retail giant Amazon.com, which had been up 70 percent through late September is down 12 percent so far this month. Netflix, which was up nearly 100 percent at the end of last month, is down 12.8 percent. | The tech-heavy Nasdaq Composite index, which was one of the best performing financial assets earlier this year rising more than 16 percent through September. The Nasdaq tumbled 4 percent Wednesday, and is down 7.8 percent in October, with some stocks that had been sterling performers now lagging badly. Online retail giant Amazon.com, which had been up 70 percent through late September is down 12 percent so far this month. Netflix, which was up nearly 100 percent at the end of last month, is down 12.8 percent. |
| Semiconductor stocks have been particularly hard hit, with the Philadelphia Semiconductor index down more than 9 percent in the month. With large global supply chains centering in Asia, semiconductor shares have been something of a bellwether for the ongoing trade tensions between the United States and China. | Semiconductor stocks have been particularly hard hit, with the Philadelphia Semiconductor index down more than 9 percent in the month. With large global supply chains centering in Asia, semiconductor shares have been something of a bellwether for the ongoing trade tensions between the United States and China. |
| “It looks as though Trump is settling most of the trade skirmishes around the world that he started earlier this year with one important exception,” said Ed Yardeni, president of stock market research firm Yardeni Research. “It looks like China is going to be a long-term issue.” | “It looks as though Trump is settling most of the trade skirmishes around the world that he started earlier this year with one important exception,” said Ed Yardeni, president of stock market research firm Yardeni Research. “It looks like China is going to be a long-term issue.” |
| Investors seem to be taking something of a cue from Vice President Mike Pence’s hawkish speech on policy toward China last week. Separately Bloomberg Businessweek published a story last week describing how Chinese spies used technology embedded on microchips to infiltrate American companies. | Investors seem to be taking something of a cue from Vice President Mike Pence’s hawkish speech on policy toward China last week. Separately Bloomberg Businessweek published a story last week describing how Chinese spies used technology embedded on microchips to infiltrate American companies. |
| “There’s an increasing realization in the market that this is not just about the trade deficit. This is about security concerns this is about geopolitical strength,” said Evan Brown, director of asset allocation at UBS Asset Management. “It’s about encouraging U.S. companies to move their supply chains out of China. And so there are questions about a broader disruption and potential legislation or scrutiny in these markets.” | “There’s an increasing realization in the market that this is not just about the trade deficit. This is about security concerns this is about geopolitical strength,” said Evan Brown, director of asset allocation at UBS Asset Management. “It’s about encouraging U.S. companies to move their supply chains out of China. And so there are questions about a broader disruption and potential legislation or scrutiny in these markets.” |
| Many market observers expect strong third-quarter earnings will be enough to help stocks recover from the recent tumble. Those reports will start to flow in earnest this Friday, when large banks J.P. Morgan Chase, Wells Fargo and Citigroup are slated to post results. | Many market observers expect strong third-quarter earnings will be enough to help stocks recover from the recent tumble. Those reports will start to flow in earnest this Friday, when large banks J.P. Morgan Chase, Wells Fargo and Citigroup are slated to post results. |
| Thanks to the strength of the economy and steep cuts in corporate tax rates, corporate earnings are expected to rise more than 20 percent from the third quarter of 2017, according to John Butters, an earnings analyst with FactSet. That would be the third consecutive quarter of earnings growth of more than 20 percent. | Thanks to the strength of the economy and steep cuts in corporate tax rates, corporate earnings are expected to rise more than 20 percent from the third quarter of 2017, according to John Butters, an earnings analyst with FactSet. That would be the third consecutive quarter of earnings growth of more than 20 percent. |
| But there are some risks to that outlook. As the economy heats up, costs are climbing and starting to eat into relatively fat profit margins. On Wednesday, Fastenal, a company that makes products such as industrial bins used on factory floors, reported better-than-expected profit and sales numbers. But its profit margin fell short of expectations, and the stock fell more than 5 percent. | But there are some risks to that outlook. As the economy heats up, costs are climbing and starting to eat into relatively fat profit margins. On Wednesday, Fastenal, a company that makes products such as industrial bins used on factory floors, reported better-than-expected profit and sales numbers. But its profit margin fell short of expectations, and the stock fell more than 5 percent. |
| “We are starting to see some margin pressure from higher raw materials and energy and labor costs,” said Savita Subramanian, equity strategist with Bank of America Merrill Lynch. Still, she stressed that strong economic demand should support corporate profits, even if margins start to contract. | “We are starting to see some margin pressure from higher raw materials and energy and labor costs,” said Savita Subramanian, equity strategist with Bank of America Merrill Lynch. Still, she stressed that strong economic demand should support corporate profits, even if margins start to contract. |
| That’s one reason she thinks that the stock market remains an attractive place for investors, even with rising inflation and interest rates. | That’s one reason she thinks that the stock market remains an attractive place for investors, even with rising inflation and interest rates. |
| “I would stick with equities for the time being,” she said. | “I would stick with equities for the time being,” she said. |