Market drops on rate hike fears

Dow sheds 697, worst day in two months

Stocks tumbled to their worst day in two months Tuesday, buckling under worries about higher interest rates and their tightening squeeze on Wall Street and the economy.

The S&P 500 fell 2% for its sharpest drop since the market was selling off in December. The Dow Jones Industrial Average lost 697 points, or 2.1%, while the Nasdaq composite sank 2.5%.

Home Depot fell to one of the market’s larger losses after giving financial forecasts that fell short of Wall Street’s expectations. It dropped 7.1% despite reporting stronger profit for the last three months of 2022 than expected.

The retailer said it would spend $1 billion to increase wages for hourly U.S. and Canadian workers. That fed into broader worries for markets that rising costs for companies have been eating into profits, which are one of the main levers that set stock prices.

The other main lever is also looking precarious as interest rates continue to rise. When safe bonds are paying higher amounts of interest, they make stocks and other investments look less attractive. Why take a lot of risk on stocks if safer things are paying out more? Higher rates also raise the risk of a recession because they slow the economy in hopes of snuffing out inflation.

Rates and stock prices are high enough that strategists at Morgan Stanley say U.S. stocks look to be more expensive than at any time since 2007.

The yield on the 10-year Treasury, which helps set rates for mortgages and other important loans, leaped further to 3.95% from 3.82% late Friday. The two-year yield, which moves more on expectations for the Fed, rose to 4.72% from 4.62%. It’s close to its highest level since 2007.

“That is what’s weighing on the market,” said Keith Lerner, chief market strategist at Truist Advisory Services.

Another threat for the market is that the Fed may not be as quick to cut rates in the face of economic weakness as it has in the past, said Truist’s Lerner.

“This is the first time in over a decade the Fed has had to worry about inflation,” he said. “What happened last year has created scar tissue that could keep rates higher for longer.”