U.S. stock markets recorded their third consecutive day of losses, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all declining. This marks the longest coordinated losing streak for the three major indexes since March, driven by rising bond yields and fresh economic data that suggests a stronger-than-anticipated economy.
The Dow fell by 179 points, a 0.4% drop, while both the S&P 500 and the Nasdaq Composite decreased by 0.5%. The sustained downturn reflects investor caution as they process economic signals that could influence future Federal Reserve policy.
Key Takeaways
- Major U.S. stock indexes fell for a third straight day, the longest such streak since March 28.
- Stronger-than-expected Gross Domestic Product (GDP) data for the second quarter was revised upward to a 3.8% annual rate.
- Rising Treasury yields contributed to market pressure, with the 10-year yield climbing to 4.17%.
- Analysts suggest the market may be overbought, with high valuations leaving little room for error.
Broad Market Retreat Continues
The stock market's downward trend deepened as all three primary U.S. indexes closed lower for the third session in a row. According to Dow Jones Market Data, this is the first time since March 28 that the Dow, S&P 500, and Nasdaq have fallen in unison for three consecutive days.
During this period, the S&P 500 has lost 1.4% of its value. While such pullbacks are not uncommon, they often signal a shift in investor sentiment. Historical data shows that over the past five years, the S&P 500 has experienced a three-day decline on 68 separate occasions, with an average loss of 2.7% during those periods.
The selling pressure was widespread. Exchange-traded funds (ETFs) focused on various strategies, including small-caps, momentum, value, and growth, all experienced declines. The energy sector was the sole gainer among the 11 S&P 500 sectors.
Economic Strength and Bond Market Pressure
A key factor influencing the market was a final estimate of second-quarter U.S. gross domestic product. The Bureau of Economic Analysis (BEA) reported that the economy grew at an annualized rate of 3.8%, a half-percentage point higher than its previous estimate.
The upward revision was attributed primarily to stronger consumer spending. While a robust economy is generally positive, the data complicates the outlook for interest rates. Following the report, investor bets on a half-point in rate cuts by December fell to 60.5%.
Impact of Treasury Yields
Rising government bond yields often put pressure on stocks. Higher yields on safe assets like Treasury notes make riskier investments like equities less attractive by comparison. The yield on the 2-year Treasury note, which is sensitive to near-term interest rate expectations, rose to 3.66%, while the 10-year Treasury yield increased to 4.17%.
Investors are now looking ahead to the release of the personal consumption expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, for further clues on the direction of monetary policy.
Analysts Warn of High Valuations
Some market analysts believe the recent pullback is a natural response to a market that had become overextended. Indicators earlier in the week suggested the S&P 500 was in "short-term overbought" territory, meaning prices had risen too quickly.
"We agree that the economy is strong and growing and we have been impressed with corporations’ ability to navigate a challenging environment and produce strong results, but a lot of that good news is already priced in–and then some," wrote Chris Zaccarelli, chief investment officer for Northlight Asset Management.
Zaccarelli added that high valuations leave the market with little room for error. "If we see some volatility in the near term (which we believe is a strong possibility) it will be because we are starting with much higher-than-average valuations," he noted.
Jonathan Krinsky, chief market technician at BTIG, shared a similar view, suggesting that stocks are vulnerable to further declines.
Market Technicals
Despite the recent decline, the S&P 500 remains significantly above its 50-day moving average, a key technical indicator of the medium-term trend. Krinsky suggests that a drop to test this level, currently around 4,446, would be a typical market correction and could "set-up a better year-end rally entry point."
External Factors and Commodity Markets
Beyond economic data, Wall Street is also monitoring political developments. Efforts in Congress to pass a funding bill and avert a government shutdown are being closely watched, as a shutdown could introduce new economic uncertainty.
In the commodity markets, crude oil futures had a mixed session. West Texas Intermediate (WTI) crude, the U.S. benchmark, slipped by one cent to settle at $64.98 a barrel. Brent crude, the international standard, rose 0.2% to $69.42 a barrel.
Concerns over Russian energy supplies continue to influence the oil market. Phil Flynn of the Price Futures Group noted that Ukrainian attacks on Russian oil infrastructure have become a central issue for traders. "With Europe planning tougher sanctions on Russian oil and gas, it could create a situation where we could start to see significant change in market psychology and a potential breakout to the upside," Flynn stated.
September's Historical Trend
The market's recent slide has trimmed the S&P 500's gain for September to 2.3%. Earlier in the month, the index had been up by as much as 3.7%.
Historically, September is known as the weakest month of the year for stocks. According to Dow Jones Market Data going back to 1928, the index has typically seen its losses concentrated in the second half of the month. The average decline in the first half of September is 0.3%, compared to a 0.9% decline in the second half.
While past performance does not guarantee future results, the historical trend adds another layer of caution for investors as the month draws to a close.
