Written by Stan Choi, and Damien J. Troyes and Alex Vega
Stocks closed lower and Treasury yields rose on Friday with many Wall Street expecting the Federal Reserve to raise interest rates as soon as March despite the mixed report on the US job market.
The downbeat finish capped the S&P 500 tech sector’s worst week since October and the biggest weekly decline for the Nasdaq tech-heavy index in nearly a year.
The S&P 500 Index is down 0.4%, and the yield on 10-year Treasuries is at its highest level since COVID-19 began hitting the markets at the beginning of 2020. The benchmark index had risen 0.3% early on and then dropped as much as 0.7 % after the mixed reading from the US Labor Department, which is usually the most anticipated economic data each month.
Employers added only about half the number of jobs last month that economists had expected, which looks negative for the economy. But average wages for workers rose more than expected. On the whole, many investors saw this as evidence that the jobs market is strong enough for the Federal Reserve to continue its tendency to raise interest rates more quickly from record lows.
Will this bring the Fed to the negotiating table in March or June? said Megan Hornman, director of portfolio strategy at Verdence Capital Advisors. “It is a moot point, in the long run. They will raise prices in 2022.”
Higher rates could help control the high inflation sweeping the world, but they would also put an end to the conditions that have put financial markets in “easy mode” for many investors since early 2020. High rates also make high-tech and growth stocks expensive. The other price is less attractive, which is why the S&P 500 tech sector bore the brunt of the sell-off this week as bond yields soar.
Immediately after the report’s release, Treasury yields continued their sharp gains this week as expectations built for the Federal Reserve to raise interest rates more quickly. The yield on the 10-year Treasury was 1.77%, up from 1.73% late Thursday. This is the highest closing point since mid-January 2020, according to Tradeweb.
Investors are now pricing in a better than 79% probability that the Fed will raise short-term interest rates in March. A month ago, they saw less than a 39% chance of that, according to CME Group.
“The error (on the job additions) was not significant enough to alter any of the Fed’s plans regarding the tightening cycle,” said Cliff Hodge, chief investment officer at Cornerstone Wealth.
Brian Jacobsen, chief investment analyst at Allspring Global Investments, noted that hourly wages for leisure and hospitality workers rose 14% from a year earlier. That’s a strong jump for a group that includes nearly one in eight workers in the private sector.
“It’s a strong report, and perhaps assure the Fed” that it should remain more biased toward raising interest rates rather than continuing to pump massive amounts of aid into the economy, Jacobsen said.
Record low rates have been a major reason for the stock market’s speed to record numbers since the outbreak of the pandemic. When bonds pay less interest, people are willing to pay higher prices for stocks and other investments.
This is why any potential rate hike is worrying, even though the Fed has clearly telegraphed that it could raise interest rates three times in 2022. It has already slowed its monthly bond purchases to lower long-term interest rates, Minutes released this week, including the latest from the meeting, showed that the Fed might get rid of such purchases from its balance sheet more quickly this time.
Friday’s decline marked the fourth consecutive decline for the S&P 500. It closed down 19.02 points to 4,677.03 points, or 2.5% below Monday’s high.
The Dow Jones Industrial Average fell 4.81 points, or less than 0.1%, at 36,231.66, after earlier flipping between a gain of 146 points and a loss of 124. The Nasdaq Composite fell 144.96 points, or 1%, to 14,935.90. All major indices posted a weekly loss, although the Nasdaq’s weekly decline was the largest since late February.
Nasdaq has more technology stocks than other indices, and such companies tend to be hurt more by rising interest rates. It’s the flip side of the benefits they’ve had through much of the pandemic, when lower rates have prompted investors to pay higher rates for companies that can grow regardless of the strength of the economy. Lower rates also made investors more willing to buy companies whose expected earnings could take years to pay off.
Shares of smaller companies fell more than the broader market. The Russell 2000 Index fell 26.56 points, or 1.2%, to 2,179.81.
Tesla fell 3.5 percent and Nvidia 3.3 percent. Both were among the heaviest in the S&P 500.
AP Business contributing writer Elaine Kortenbach.