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Equities saw their largest decline in eight months on Wednesday, as investors continued to absorb rising interest rates and advanced tech stocks fell in the face of mounting tensions with China.
The Standard & Poor's 500 index fell 3.3%, resulting in a 4.4% decline in the broad equity index for the month. The 10-year Treasury Note yield, a key measure of borrowing costs, increased slightly to over 3.24% during the trading day before the decline.
Wednesday's fall marked the fifth consecutive daily decline in the S. & P. 500, the longest series of negative periods since November 2016, according to a study by Bespoke Investment Group. And the decline of the day was the strongest since the liquidation of the market in February.
Then, as now, worries about nascent inflation, rising interest rates, and the Fed's tightening potential for monetary policy motivated sales.
The recent rise in bond yields – which had reached the levels last achieved in 2011 – has once again become a major concern for stock investors.
The rise in bond yields is kind of a double-edged sword. They reflect the strength of the US economy, where unemployment is at its lowest level in 49 years. But yields also serve as the basis for the main borrowing costs, including those for mortgages.
"Stock markets appreciate rising interest rates as they tend to represent a strong economic backdrop," said Jonathan Golub, chief equity strategist for Credit Suisse. "That said, stock markets do not like very abrupt and important moves."
Some interest-sensitive market sectors suffered sharp declines, as borrowing costs increased. Rising interest rates pushed conventional 30-year mortgage rates to 5%, adversely affecting both homeowners' financial capacity and share prices.
Shares of home builders in the S. & P. 500 are down more than 7% this month. And so far this year, housing construction inventories have declined by more than 25%.
But in addition to rising interest rates, other worries persist among dog-dog investors who have walked the bull market of nearly a decade of equities.
The Nasdaq Composite, highly technology-driven index, which was one of the best-performing financial assets at the start of the year, rose more than 16% from September. The Nasdaq plummeted 4% Wednesday and down 7.8% in October. Some titles, which performed exceptionally well, have now fallen behind. The online retail giant Amazon.com, up 70% until the end of September, is down 12% since the beginning of the month. Netflix, up nearly 100% at the end of last month, is down 12.8%.
Semiconductor stocks were particularly hard hit as the Philadelphia Semiconductor Index lost more than 9% during the month. With large global supply chains focusing in Asia, semiconductor shares have been an indicator of ongoing trade tensions between the United States and China.
"It seems that Trump is settling most of the commercial skirmishes that he started earlier this year with a major exception," said Ed Yardeni, chairman of stock market research firm Yardeni Research. "It seems that China will be a problem in the long run."
Investors seem to be taking the example of Vice President Mike Pence's warmongering speech on China's policy last week. Separately, Bloomberg Businessweek published an article last week describing how Chinese spies were using microchip technology to infiltrate US businesses.
"The market is realizing more and more that it's not just about the trade deficit. It's a security issue that concerns geopolitical strength, "said Evan Brown, director of asset allocation at UBS Asset Management. "It's about encouraging American companies to move their supply chains out of China. And so there are questions about a wider disruption and potential legislation or control over these markets. "
Many market commentators expect the solid third quarter results to be enough to help stocks recover from the recent downturn. These reports will begin to be taken seriously this Friday, when the big banks, J.P. Morgan Chase, Wells Fargo and Citigroup are expected to publish their results.
With the strength of the economy and strong corporate tax cuts, corporate profits are expected to grow more than 20% from the third quarter of 2017, according to John Butters, a profit analyst. at FactSet. This would be the third consecutive quarter of earnings growth of more than 20%.
But this perspective carries risks. As the economy heats up, costs rise and begin to nibble relatively large profit margins. On Wednesday, Fastenal, a company that produces products such as industrial bins used in workshops, recorded profits and sales exceeding expectations. But its profit margin did not live up to expectations and the stock fell by more than 5%.
"We are starting to see pressure on margins from rising raw material, energy and labor costs," said Savita Subramanian, equity strategist at Bank of America Merrill Lynch. However, she pointed out that strong economic demand should support corporate profits, even if margins begin to contract.
This is one of the reasons she thinks that the stock market remains an attractive place for investors, even with inflation and rising interest rates.
"I will stick to the actions for the moment," she said.
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