Stocks Lose Ground as Earnings Rise; yields increase

A broad decline on Wall Street reversed two days of gains for stocks on Wednesday as Treasury yields hit multi-year highs, tempting traders with higher yields on relatively low-risk investments.

The pullback came as investors scrutinized a mix of quarterly reports from several companies. Netflix and United Airlines rose sharply after their quarterly results were released, while others including Abbott Laboratories and M&T Bank sank.

The major indexes rose initially, but their gains quickly faded. The S&P 500 fell 0.7%, the Dow Jones Industrial Average slid 0.3% and the Nasdaq composite ended down 0.9%. Smaller companies fell more than the rest of the market, sending the Russell 2000 index down 1.7%.

The shares were coming off two days of gains, but trading was choppy throughout.

“Today was interesting in that it was almost a reality check for the market,” said Quincy Krosby, chief equity strategist for LPL Financial. “Not only were the yields higher, but you also had a much stronger dollar today, and that’s a recipe for market trouble.”

The 10-year Treasury yield, which influences mortgage rates, climbed to 4.13%, its highest level since June 2008. It was at 4.02% on Tuesday evening. The two-year Treasury yield, which tends to track expectations for future Federal Reserve action, rose to 4.54% from 4.43%.

A sharp move in the three-month Treasury may have helped put traders in a selling mood. The yield briefly hit 4.01% before falling back to 3.98%. If the yield on the three-month Treasury were to rise above that of the 10-year Treasury, known as a reversal, it would be a strong warning that the economy could be heading into a recession.

“It takes a while for the (Treasury) three-month deadline to reverse, but it’s getting closer and closer to the 10-year deadline,” Krosby said.

The S&P 500 fell 24.82 points to 3,695.16. The Dow fell 99.99 points to close at 30,423.81. The Nasdaq lost 91.89 points to 10,680.51. The Russell 2000 gave up 30.20 points at 1,725.76.

Homebuilders and other businesses related to the housing industry fell on Wednesday following a report showing new home construction fell more than expected in September. Homebuilder Lennar fell 6% and home improvement retailer Lowe’s slipped 4.8%.

US crude oil prices rose 3.3%, giving energy stocks a boost. Exxon Mobil rose 3%. The White House plans to announce another release of oil from the US Strategic Reserve.

Investors focused on the latest round of corporate earnings this week. The latest results are being closely watched for clues as to how companies are coping with the highest inflation in four decades and how they intend to operate for the rest of the year and into ‘in 2023.

Netflix climbed 13.1% after the company said it attracted 2.4 million subscribers in the July-September period, a comeback after losing 1.2 million customers in the first half.

United Airlines rose 5% after posting strong third-quarter financial results. American Airlines will release its results on Thursday.

Homewares giant Procter & Gamble rose 0.9% after also posting strong financial results. He joined a growing list of companies, including Hasbro and Johnson & Johnson, warning investors of a strong US dollar reducing revenue. A strong dollar decreases the value of foreign sales after currency conversion. The US currency is now worth more than one euro for the first time in 20 years.

The dollar strengthened against currencies around the world as fears of inflation and recession prompted investors to seek relatively stable investments. Central governments and banks around the world face stubbornly high inflation. UK food prices rose at the fastest pace since 1980 last month, driving inflation back to a 40-year high.

The United States faces its own potential recession as high prices for everything from food to clothing barely budge and the Fed raises interest rates to temper inflation.

The Fed’s rate hikes are intended to make borrowing more difficult and slow economic growth in an effort to control inflation. The strategy risks stalling the already slowing US economy and triggering a recession.

“It’s the chicken game happening,” said Steve Chiavarone, senior portfolio manager at Federated Hermes. “The Fed can only restore price stability by hurting demand, that is, by causing a recession.”

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