It has been an ugly stretch for U.S. stocks, which was capped by Wednesday’s more-than-830-point tumble for the Dow Jones Industrial Average.
To recap: The Dow DJIA, -1.04% and the S&P 500 index SPX, -1.08% booked their worst one-day slumps since Feb. 8, while the Nasdaq Composite Index COMP, -0.73% put in its worst single-session skid since Brexit, when the U.K. voted to exit from the European Union, roiling global markets in 2016.
Wednesday’s action wasn’t as severe as Brexit, but the downbeat action cast a pall over a rally that has mostly been driven by domestic economic strength and earnings that have been buoyed by corporate tax cuts.
So, what’s next? And what has led to an apparent broad-based unraveling of stock benchmarks that were testing new heights about a week ago?
Rising rates are hurting
Rapidly climbing bond yields, which gain as prices fall, have fueled fears that profit margins of U.S. corporations may be squeezed by higher labor costs and loftier borrowing expenses. The 10-year Treasury note TMUBMUSD10Y, -0.18% a government bond that is used to price mortgages, auto loans and other debt, has seen its yields climb toward a seven-year peak (rates retreated somewhat amid Wednesday’s stock fall).
“Today’s equity selloff is a reaction from investors finally realizing we are in a higher interest-rate environment, and given the elevated level of stocks, market participants were likely looking for a reason to sell. Higher interest rates typically bring on tighter financial conditions which could dampen growth going forward and equity markets are reacting to that,” said Charlie Ripley, senior strategist at Allianz Investment Management.
FANG stocks get dumped
Escalating costs of borrowing have had a more pronounced effect on megacapitalization companies like Amazon.com Inc. AMZN, -3.26%