Wall Street Turns Mixed Following Good News on the Economy Today
Stock Market Slumps as Strong Economy Brings Higher Interest Rates
The US stock market experienced a significant decline on Tuesday, with the S&P 500 falling 1.1% after giving up an early gain. The Dow Jones Industrial Average dropped 178 points, or 0.4%, while the Nasdaq composite tumbled 1.9%. This downturn in the market can be attributed to the rising yields in the bond market, which increased immediately following the release of encouraging reports on the US economy.
Encouraging Reports on Economy
Two recent reports provided positive news for workers looking for jobs and those concerned about a possible recession. The first report showed that U.S. employers were advertising more job openings at the end of November than economists had expected. The second report indicated that activity for finance, retail, and other services businesses grew much faster in December than anticipated.
Rising Interest Rates
The strong economy is likely to keep pressure on inflation, making it less likely for the Federal Reserve (Fed) to deliver interest rate cuts that Wall Street favors. In September, the Fed began cutting its main interest rate to give the economy a boost, but hinted at a slowdown in easing. The threat of tariffs from President-elect Donald Trump has raised worries about possible upward pressure on inflation, which has stubbornly remained just above the Fed’s 2% target.
Disappointing Trends on Inflation
The Institute for Supply Management’s (ISM) report on US services industries contained discouraging trends on inflation, stating that price increases accelerated in December. This news sent expectations for fewer interest rate cuts in 2025 rising, leading to higher longer-term Treasury yields. The yield on a 10-year Treasury climbed to 4.69% from 4.63% shortly before the release of Tuesday’s reports and from just 4.15% in early December.
Higher Yields Impact Stock Market
The higher yields make Treasury bonds more attractive to investors who might otherwise buy stocks, putting downward pressure on stock prices. The super-safe bonds are paying notably more, which has led to a decline in the value of stocks seen as expensive. This has put heavy pressure on Big Tech stocks such as Nvidia and other companies that have soared due to artificial-intelligence technology.
Nvidia’s Losses
Nvidia had been on track to set another all-time high in morning trading after CEO Jensen Huang unveiled a suite of new products and partnerships the night before. However, after Tuesday morning’s economic reports were released, Nvidia swung to a loss of 6.2% and became the heaviest weight on the S&P 500.
Other Notable Losses
Losses for Amazon, Tesla, Apple, and Microsoft were also significant contributors to the decline in the stock market. The Dow Jones Industrial Average slipped 178.20 to 42,528.36, while the Nasdaq composite sank 375.30 to 19,489.68.
Good News is Bad News
According to Bank of America strategists led by Ohsung Kwon, "we believe the market is shifting into a ‘good news is bad news’ environment again." This shift raises the stakes for Friday’s coming update on the US job market, which economists expect will show a slowdown in overall hiring. A "Goldilocks" reading for the US stock market that would be solid but not too strong for the Fed would likely be in the 125,000 to 175,000 range, along with an unemployment rate of 4.2%.
Notable Gains
However, some stocks did experience gains on Tuesday. Cintas rose 2% after making public its offer to buy its smaller rival, UniFirst, for $275 per share. Getty Images shareholders will own a slight majority of the combined company, leading to a jump in shares of 24.1%. All told, the S&P 500 fell 66.35 points to 5,909.03.
Global Market Impacts
In other parts of the world, some notable Chinese companies experienced losses after the US Defense Department added dozens of them to a list of companies it says have ties to China’s military. The announcement caused some of the companies to protest and say they will seek to have the decision reversed. Added to the list were gaming and technology company Tencent, artificial intelligence firm SenseTime, and the world’s biggest battery maker CATL.
Conclusion
The strong economy is bringing higher interest rates, which is impacting the stock market in a negative way. The rising yields are making Treasury bonds more attractive, leading to downward pressure on stock prices. However, some companies did experience gains on Tuesday, including Cintas and Getty Images. As the market continues to shift into a "good news is bad news" environment, investors will need to be cautious and prepared for further changes.
Recommendations
Investors should consider diversifying their portfolios to minimize risk. They may also want to explore investing in companies that are less affected by rising interest rates or economic fluctuations. Additionally, keeping an eye on global market trends and potential impacts on individual stocks can help investors make informed decisions.
Sources
- The Institute for Supply Management (ISM)
- The Federal Reserve (Fed)
- The US Defense Department
- Bank of America strategists led by Ohsung Kwon
Note: This article is intended to provide general information and should not be considered as investment advice. It’s always best to consult with a financial advisor before making any investment decisions.
