Stocks in the United States fell significantly on Tuesday, as the market appeared to be having its so-called taper tantrum.
The Dow Jones Industrial Average was down 570 points, or 1.6 percent, by the afternoon. The S&P 500 fell 2%, while the Nasdaq Composite fell 2.8 percent.
When the Federal Reserve announces that it will lower the number of bonds it buys each month as the economy improves and requires less assistance, this is known as a “taper tantrum.” The last time this happened was in 2013, several years after the financial crisis, when the Federal Reserve chose to scale out its bond-buying program gradually. Bond prices fall when less money enters the market, and bond yields rise.
“The Fed was a touch more hawkish at their most recent meeting, prompting some to worry a repetition of the 2013 ‘taper tantrum,’ which proved to be a terrible moment for all risk assets,” says Brian Price, head of investment management at Commonwealth Financial Network. “Anytime we see the 10-year UST yield move such a large amount in such a short period of time, especially from low beginning levels, it usually corresponds with a significant market selloff.”
The 10-year Treasury yield increased to 1.54 percent on Tuesday, up from 1.48 percent on Monday and 1.31 percent last week. Bond rates began to rise when the Federal Reserve stated that its bond purchases will be reduced to zero by mid-2022.
Not only is the Fed expected to withdraw the $120 billion it is pumping into the bond market in less than a year, but rates have also been low. According to statistics from the St. Louis Fed, the race higher in bond rates isn’t surprising to some on Wall Street because the yield is still below long-term inflation forecasts of above 2%. This makes the bond less appealing to buy than if it paid a higher rate of return than inflation.
Higher rates have an especially negative impact on stock values in fast-growing technology firms. Because they are valued based on profit growth over many years, their values are extremely susceptible to fluctuations in long-dated rates.
The Nasdaq 100, which includes 100 of Nasdaq’s biggest market capitalization stocks, fell 2.9 percent. The shares of Amazon.com (AMZN) declined 2.6 percent, while Zoom Video Communications (ZM) fell 4%.
While the stock market’s decline is concerning, investors will be watching to see if the S&P 500 goes below its 100-day moving average, a critical technical milestone. A dip below that level would signal those investors are losing even more faith in the market, but buyers coming in at that moment would be a good sign.