Stocks fall as investors fret over inflation
Stocks posted modest losses Thursday as investors had little reason to buy stocks with discouraging economic data and a steady rise in bond yields, which has started to raise concerns about inflation.
The S&P 500 index dropped 17.36 points, or 0.4 percent, to 3,913.97. It was the third straight decline for the index. The Dow Jones Industrial Average lost 119.68 points, or 0.4 percent, closing at 31,493.34 and the technologyheavy Nasdaq Composite fell 100.14 points, or 0.7 percent, to 13,865.36. The Russell 2000 of small companies fell 1.7 percent, a significant drop for that index.
Energy prices declined for a second day, as the frigid temperatures that impacted Texas and much of the Midwest moved east. Natural gas prices closed down 4.3 percent. Energy prices have been volatile the past week as record demand for natural gas and other fossil fuels to warm homes has caused electricity prices to skyrocket. Natural gas is typically used as an “ondemand” fuel source to cover increased electrical needs.
Bond yields continue to climb, as murmurs of inflation have started among investors and as the economy continues to climb out of the hole that was created by the pandemic. The yield on the 10year U.S. Treasury note was at 1.29 percent, nearly double where it was last fall. It’s now trading at levels seen before the March 2020 pandemic shutdowns.
The climb in bond yields has multiple impacts on the market. When bonds pay higher yields, they are more attractive to a broader group of investors, who tend to move money out of lowperforming or low dividend-paying stocks and into the steady income of bonds. It’s a push-pull phenomenon that’s existed in the market for decades. With bonds no longer paying out rock-bottom yields, the inverse relationship between stocks and bonds could be reasserting itself.
Secondly, the bond market tends to be a good predictor for the economy. The steady rise in yields means investors see the economy getting better but it also suggests they’re concerned about inflation. President Joe Biden’s plan to spend $1.9 trillion on stimulus could be somewhat inflationary, although in a recession, that is not necessarily a bad thing.
Optimism that rollouts of coro navirus vaccines will set the stage for stronger economic growth in the second half of this year has been pushing the stock market higher. But expectations of a post-pandemic recovery also have resurrected concerns over inflation that could prompt governments and central banks to pull back on stimulus down the road in several months or even a year.
The momentum of the stock market, particularly Thursday, danced closely with the bond market. When bond yields tipped lower in the afternoon, the stock market recovered more than half of its losses from earlier in the day.