The United States economy has been experiencing a resurgence in recent times, with better-than-expected reports on the job market and business activity. However, this good news has come as a disappointment to investors on Wall Street, who are worried about the implications of a strong economy.
Stock Market Slumps
On Tuesday, the stock market slumped following the release of the encouraging economic reports. The S&P 500 fell by 1.1%, while the Dow Jones Industrial Average dropped by 178 points (0.4%). The Nasdaq composite tumbled by 1.9%. This downward trend was largely driven by rising yields in the bond market, which jumped immediately after the release of the economic reports.
Rising Yields and Bond Market
The strong economic reports led to a surge in interest rates, with the yield on a 10-year Treasury climbing to 4.69% from 4.63% shortly before the release of Tuesday’s reports. This rise in yields made Treasury bonds more attractive to investors who might otherwise buy stocks. As a result, stock prices fell as investors became increasingly drawn to the safety and higher returns offered by government bonds.
Impact on Stock Prices
The rising yields had a particularly significant impact on the prices of tech stocks, which have been among the most expensive in recent times. Nvidia, for example, was on track to set an all-time high after CEO Jensen Huang unveiled a suite of new products and partnerships. However, after Tuesday morning’s economic reports, Nvidia swung to a loss of 6.2% and became the heaviest weight on the S&P 500.
Amazon, Tesla, Apple, and Microsoft
Losses for Amazon, Tesla, Apple, and Microsoft were among the next-strongest forces dragging the index lower. These tech giants have been among the biggest beneficiaries of the economic boom in recent times, but their prices are now facing downward pressure due to rising interest rates.
Shift to ‘Good News is Bad News’ Environment
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 means that investors will be increasingly wary of good economic news, which could put downward pressure on stock prices.
Implications for Federal Reserve
The strong economy and rising interest rates have made it less likely that the Federal Reserve will deliver the cuts to interest rates that Wall Street has been hoping for. The Fed began cutting its main interest rate in September to give the economy a boost, but it’s hinted at a slowdown in easing.
Tariffs and Inflation
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. Tuesday’s report on U.S. services industries from the Institute for Supply Management also contained discouraging trends on inflation.
Expectations and Markets
The expectations of fewer cuts to interest rates in 2025 have already been building for weeks, sending longer-term Treasury yields upward. Worries about other possible Trump policies, such as tax cuts, which could swell the U.S. government’s debt and push yields higher, are also contributing to the downward pressure on stock prices.
Cintas and UniFirst
However, not all companies were affected by the market downturn. Cintas rose 2% after making public its offer to buy its smaller rival, UniFirst, for $275 per share in cash. This news helped keep Tuesday’s losses for U.S. stock indexes in check.
Getty Images and Shutterstock
Another notable development was the announcement that Getty Images and Shutterstock were joining forces to become a $3.7 billion visual content company. Getty shares jumped 24.1%, while Shutterstock climbed 14.8%. This merger is expected to provide customers with a broader array of still imagery, video, music, 3D, and other media.
Global Markets
The S&P 500 fell by 66.35 points to 5,909.03, the Dow Jones Industrial Average slipped 178.20 to 42,528.36, and the Nasdaq composite sank 375.30 to 19,489.68. In global markets, some notable Chinese companies fell after the U.S. Defense Department added dozens of them to a list of companies it says have ties to China’s military.
Tencent, SenseTime, and CATL
The announcement caused some of the companies to protest and say they will seek to have the decision reversed. Tencent’s stock that trades in Hong Kong fell 7.3%, while indexes were stronger elsewhere in China and across much of Asia and Europe.
Conclusion
The good news for the economy has come as bad news for Wall Street, with investors worried about the implications of a strong economy. The rising yields and bond market have put downward pressure on stock prices, particularly among tech stocks. As the Federal Reserve considers its next move, investors will be watching closely to see how it responds to the changing economic landscape.
Sources:
- AP Business Writers Yuri Kageyama and Matt Ott contributed.
