S&P 500 and Dow Lose 3% while Nasdaq Composite Slides 5%

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(Thursday Market Close) Stocks staged a stunning reversal of Wednesday’s Fed rate announcement rally, as investors considered the steepest drop in U.S. productivity in 75 years and 10-year Treasury yields (TNX) edging above 3% for the first time since 2018.

The S&P 500 (SPX) lost more than 3% while the tech-heavy Nasdaq Composite ($COMP) finished down 5% at the close. With the Dow Jones Industrial Average ($DJI) falling more than 3.1% during the session, the major indexes gave back most of Wednesday’s gains.

Nonfarm productivity slid at a 7.5% annualized rate last quarter, the deepest since the third quarter of 1947, the Labor Department said on Thursday. Fourth-quarter numbers were revised to show productivity growing at a 6.3% rate instead of the previously reported 6.6% pace. Nonfarm productivity measures hourly output per worker.

The rise in the 10-year Treasury yield pressured valuations of all stocks and in particular technology and consumer discretionary stocks throughout the session. Investors had to revalue their holdings once again on a discounted future cash flow model to account for the higher yields. At the same time, the U.S. Dollar Index ($DXY) is moving ever higher, exceeding 2020 highs and testing 2017 highs. As I’ve mentioned before, the strong dollar is trouble for U.S. multinationals operating overseas because a stronger dollar makes their products and services more expensive to foreign customers.

News from overseas wasn’t helping much. April’s China’s Caixin purchasing managers’ index came in at 36.2 for April, down from 42 in March, as the nation continues its zero-COVID policy. Results under 50 indicate a slowing economy. Meanwhile, Bank of England raised its key interest rate to the highest level since 2009, adding that inflation may peak at more than 10% as the ongoing Russia-Ukraine war continues to drive energy and other consumer and business cost throughout Europe.

One standout gainer was electric heavy truck maker Nikola (NASDAQ:NKLA), which gained 6.39% after reporting its first shipments to customers in April and letters of intent for 500 of its battery-electric Tre models.

CHART OF THE DAY: 10-YEAR TRIPS TECH. The 10-year Treasury yield (TNX—candlesticks) topped 3% and is approaching resistance around 3.25%. If the TNX breaks resistance, the yield’s next stop could 4%. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Playing Both Sides?

So much of today’s action appeared to be driven by the bond markets because rising yields drove concerns over stock valuations and currency risks for multinational mega-cap companies. While the Fed attempted to try and remain even-keeled, apparently the bond market felt the central bank was too dovish, and that inflation would continue to be a problem under the Fed’s current plan.

The issue may lie with what Chair Jerome Powell called a “softish landing.” A soft landing is where the Fed slows inflation without hurting the economy too much. Few analysts believe the Fed can do this because the Fed doesn’t have a good track record of soft landings. It’s a very difficult dismount for sure.

Some critics say that the Fed is overly concerned with the “wealth effect” keeping consumption relatively strong while the Fed tightens. The wealth effect is the economic theory that people spend more money when they feel rich. If the Fed can help keep the stock market from falling, then people may continue to feel rich enough to not cut spending too much. Judging by today’s reaction, bond investors have serious doubts the Fed can walk this line.