Index Month / Year to Date
Dow Jones -3.96%/1.68%
S&P 500 -3.68%/1.82%
10-Yr Treasury yield was 2.70% at the end of January and 2.86% at the end of February
As expected, the historic stock market drop that kicked off February gave way to a month of high volatility—a pattern I believe will continue. Though the markets regained some of the losses suffered in that 10 percent correction in the first week of February, they closed lower in a turbulent session on the final day of the month.
All major indexes finished February lower, with the S&P 500 and the Dow having their worst monthly performance since January 2016, and the Nasdaq posting its weakest month since October 2016.1 While worries about inflation and rising interest rates were blamed for the initial 10 percent correction, concerns over statements made by new Federal Reserve Chairman Jerome Powell were behind the final round of sell-offs.
Chairman Powell presented an optimistic economic outlook and suggested the Fed may move forward with four short-term interest rate hikes in 2018, rather than three as previously indicated. It’s understandable why that would make Wall Street nervous. The potential of even one or two rate hikes to further flatten the yield curve could create a disincentive for lending and borrowing and derail economic progress.
That threat may continue because, as mentioned last month, long-term interest rates are expected to remain roughly the same despite the Fed’s continued effort to force them upward with the “unwinding” of quantitative easing. The 10-Year Treasury yield finished February at 2.86 percent, just slightly higher than its 2.79 percent at the start of the month.
As you may know, late last year, the Fed began selling back the $2.05 trillion in bonds it purchased through three rounds of QE, starting in 2008. Part of the intent behind this is to force long-term interest rates up by flooding the market with bonds, which increases supply and drives down prices. That, in turn, would drive up long-term rates due to the inverse relationship between bonds and interest rates.
However, even if the plan manages to push the 10-Year Treasury yield to 3 percent or just above, it might hit a strong resistance level at that point. Increased demand for bonds among the large Baby Boomer demographic looking for more secure, less volatile fixed-income investment options will offset the increased supply, keeping long-term interest rates in check!
- Sue Chang and Ryan Vlastelica, “U.S. Stocks Finish Lower; Dow, S&P 500 Log Worst Monthly Drop in Two Years,” Marketwatch, last modified on Feb. 28, 2014
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