Source: shutterstock.com/Ink Drop
It has been a mostly positive week so far in the equities market. Thus, with all three major indices down in afternoon trading, investors have reason to ask the question: Why are stocks down today? After all, this week’s price action in the stock market seemed to indicate that the soft landing everyone was hoping for will, in fact, materialize.
One of the more intriguing catalysts which appears to be dragging the stock market lower today is today’s $24 billion 30-Year U.S. Treasury auction, which saw much weaker demand than expected. Along with a bid-to-cover ratio that was among the lowest traders have seen in some time, rising yields following this auction suggest investors are growing skittish about holding long-term government debt.
Rising yields are obviously bad for the stock market and could continue to cool demand for loan products tied to longer-dated bond yields (such as mortgages and car loans), leading to less demand for products corporations sell. This is a key factor many are paying close attention to today.
Additionally, a slate of earnings set to come in, as well as comments from Federal Reserve Chairman Jerome Powell today, appear to be providing some caution to investors.
Let’s dive into what to make of this move today — and how the market is repositioning.
Why Are Stocks Down Today?
Equity investors simply don’t like uncertainty and, given the macro backdrop we’re in right now, rising bond yields at the longer end of the curve could be the item many investors didn’t have on their bingo card this year.
Indeed, given the Fed’s recent rate hikes, which have spiked the short end of the curve, lower longer-term bond yields have kept certain loan products somewhat suppressed. That said, with the yield curve dis-inverting and term premium increasing across the board, we’re all beginning to see what the effects of a more “normalized” debt market will mean for the economy. The market appears to be viewing these potential effects very negatively.
Now, the economy has weathered these rate hikes much better than I and many others expected. So, perhaps these near-term government debt auction hiccups will seem like minor affairs once they’re in the rearview mirror.
Still, the increasingly uncertain environment is clearly one investors are taking a very cautious approach with right now. That certainly makes sense, in my view.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.