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Dow slides more than 500 points as Treasury yields hit three-month high

The Washington Post logo The Washington Post 9/28/2021 Hamza Shaban
Stocks moved lower Tuesday on Wall Street, led by declines from Big Tech companies. © Seth Wenig/AP Stocks moved lower Tuesday on Wall Street, led by declines from Big Tech companies.

U.S. markets tumbled Tuesday, with investors monitoring a brewing financial crisis in Washington and high-flying tech stocks — long the darlings of Wall Street — pulling back sharply as investors adjust to looming changes from the Federal Reserve and the next phase of the pandemic economy.

The Dow Jones industrial average dropped more than 569 points, or 1.6 percent, to close at 34,299.99 on Tuesday. The S&P 500 tumbled more than 90 points, or 2 percent, to settle at 4,352.63. The tech-heavy Nasdaq shed more than 423 points, or 2.8 percent, to close at 14,546.68 and record its third consecutive day of losses.

Wall Street received its clearest signal yet that the Federal Reserve would ease off its aggressive monetary policy, as central bankers indicated last week they will pull back on supports for the markets in November if the economy progresses as expected. Since then, Treasury yields have pushed higher, compelling some investors to seek out alternatives to stocks. While the tech giants have enjoyed enormous gains during the pandemic, the sector is especially sensitive to rising interest rates, which can curtail their potential for growth over the long run.

Yellen tells Congress that U.S. will run out of debt ceiling flexibility on Oct. 18

The yield on the 10-year U.S. Treasury note climbed to 1.544 percent Tuesday, notching its sixth straight day of increases and closing in on levels not seen since June. Yields rise as bond prices fall.

“The gyrations felt across markets today are another sign that investors have become too comfortable with the levels of monetary stimulus the Fed has injected over the last 18 months,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. “Since the Fed signaled they would begin paring back stimulus in the near future, Treasury yields have been on the rise and growth stocks are taking the biggest hit as valuations in a higher rate regime look less attractive, especially in the technology sector.”

Some of the biggest names in tech — which have driven the record-shattering growth on Wall Street since the pandemic began — sank at the closing bell. Microsoft, Facebook, and Google’s parent company, Alphabet, fell by more than 3 percent, while Amazon slipped by 2.6 percent and Apple decreased by 2.4 percent.

Amazon’s founder Jeff Bezos also owns The Washington Post.

While information technology and communication services suffered the heaviest losses, every sector except energy was in the red.

“Anytime we see the 10-year UST yield move such a dramatic amount in a short period of time, especially off of low starting levels, it generally coincides with a market sell-off of some magnitude,” said Brian Price, head of investment management for Commonwealth Financial Network.

The gradual shift away from an expansive monetary policy and the political contest over President Biden’s economic agenda have rattled markets in recent weeks.

Fed signals easing of market supports could start in November, despite ongoing threat of delta variant

Fed leaders say they need to see “substantial further progress” on inflation and job growth before they soften their support for the economy. With gauges showing notable price increases, many Fed officials see the threshold cleared for inflation. But the issue over employment levels remains less clear cut. The country is still down more than 5 million jobs from before the pandemic. Last week, Federal Reserve Chair Jerome H. Powell said that many officials “feel the test for employment has been met,” while “others feel that it’s close” but want to see a little more progress.

Investors are also grappling with a tense and potentially catastrophic struggle over the debt ceiling in Washington. On Tuesday, Treasury Secretary Janet L. Yellen warned lawmakers that the U.S. will run out of flexibility to avoid breaching the debt limit on Oct. 18. Her letter to Congress arrived less than a day after Senate Republicans blocked a bill that would suspend the debt ceiling and prevent a government shutdown Friday.

The debate over the debt ceiling on Capitol Hill can lead to a reluctance to purchase bonds, said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. As bond prices move lower — through a decrease in the number of people willing to buy them — bond yields move higher, since bond yields move in the opposite direction of prices.

How investors perceive the ongoing threat of the delta variant is another factor affecting the stock market. As the highly contagious coronavirus variant prompted concerns that the economic recovery would falter, interest rates fell. But economists and Fed officials have maintained optimism even as a surge in cases has weighed on consumer spending and sapped some workers’ confidence about new job openings.

A panel of business economists tempered its expectations for economic growth this year, citing the ongoing threat of the coronavirus, but it projects that more robust growth will arrive by the end of the year and continue into 2022.

Panelists from the National Association for Business Economics boosted their outlook for U.S. economic growth for 2022 in a survey released Monday, forecasting that the nation’s gross domestic product would grow by 3.5 percent, up from 2.8 percent from a previous survey in May.

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