By DAMIAN J. TROISE and ALEX VEIGA, AP Business Writers
A broad decline on Wall Street reversed two days of gains for stocks on Wednesday, as Treasury yields rose to multi-year highs, tempting traders with higher returns on relatively low-risk investments.
The pullback came as investors reviewed a combination of quarterly reports from various companies. Netflix and United Airlines rose sharply after publishing their quarterly results, while others, including Abbott Laboratories and M&T Bank, sank.
Major indices rose at first, but their gains quickly faded. The S&P 500 fell 0.7%, the Dow Jones Industrial Average fell 0.3% and the Nasdaq Composite ended down 0.9%. Small companies fell more than the rest of the market, sending the Russell 2000 Index down 1.7%.
The stock was coming off two days of gains, but trading has been rocky throughout.
“Today was interesting in the sense that it was almost a reality check for the market,” said Quincy Krosby, chief equity strategist at LPL Financial. “Not only were yields higher, but the dollar was much stronger today, and that’s a recipe for market difficulties.”
The 10-year Treasury yield, which influences mortgage rates, rose to 4.13%, its highest level since June 2008. It was at 4.02% Tuesday night. The two-year Treasury yield, which tends to track expectations of future Federal Reserve actions, rose to 4.54% from 4.43%.
A sharp move in the three-month Treasury may have helped put traders in a selling mood. The yield briefly hit 4.01% before falling back to 3.98%. If the three-month Treasury yield exceeds the 10-year Treasury yield, known as inversion, it would be a strong warning that the economy could be headed for a recession.
“The three-month (Treasury) investment takes a while, but it’s getting closer and closer to the 10-year investment,” Krosby said.
The S&P 500 fell 24.82 points to 3,695.16. The Dow lost 99.99 points to close at 30,423.81. The Nasdaq fell 91.89 points to 10,680.51. The Russell 2000 dropped 30.20 points to 1,725.76.
Home builders and other companies related to the housing industry fell on Wednesday after a report showed new home construction declined more than expected in September. Homebuilder Lennar fell 6% and home improvement retailer Lowe’s fell 4.8%.
US crude prices rose 3.3%, giving energy stocks a boost. Exxon Mobil rose 3%. The White House plans to announce another release of oil from the US strategic reserve.
Investors have focused on the latest round of corporate earnings this week. The latest results are being watched closely for clues about how companies are dealing with the highest inflation in four decades and how they intend to operate through the rest of the year and into 2023.
Netflix soared 13.1% after the company said it gained 2.4 million subscribers during the July-September period, a recovery from a loss of 1.2 million customers during the first half of the year.
United Airlines rose 5% after reporting strong third-quarter financial results. American Airlines will report its results on Thursday.
Housewares giant Procter & Gamble rose 0.9% after also reporting strong financial results. He joined a growing list of companies, including Hasbro and Johnson & Johnson, warning investors about a strong US dollar dragging down earnings. A strong dollar decreases the value of foreign sales after converting the currency. The US currency is now worth more than one euro for the first time in 20 years.
The dollar has strengthened against currencies around the world as inflation and recession concerns prompt investors to seek out relatively stable investments. Central governments and banks around the world are dealing with stubbornly high inflation. British food prices rose at the fastest pace since 1980 last month, pushing inflation back to a 40-year high.
The United States faces its own potential recession as high prices for everything from food to clothing barely budge and the Federal Reserve raises interest rates to temper inflation.
The Federal Reserve’s rate hikes are intended to make lending more difficult and slow economic growth in an effort to control inflation. The strategy risks stalling the already slowing US economy and triggering a recession.
“That’s the chicken game going on,” said Steve Chiavarone, senior portfolio manager at Federated Hermes. “The Fed can only restore price stability if it damages demand, that is, causes a recession.”
Joe McDonald and Matt Ott contributed to this report.
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