U.S. stocks mostly took a hit on Friday, marking the fourth consecutive day of declines for the S&P 500, largely due to rising bond yields and economic concerns in China. The Dow fell by 2.2%, the S&P 500 by 2.1%, and the Nasdaq by 2.6% over the course of the week, making it the third straight week of declines for both the S&P 500 and the tech-heavy Nasdaq, according to Dow Jones Market Data.

The market drama has been predominantly driven by the depreciating value of longer-duration government bonds. The 10-year Treasury yield saw an increase for the fifth consecutive week, ending Friday at 4.251%, marking its highest level since 2007, as per Dow Jones Market Data. Despite a slight drop in the rate on Friday, the equity market remained under pressure following Thursday’s peak in the 10-year yield.

US Stocks Slip Amid China’s Economic Woes and Rising Bond Yields

US stocks largely stumbled on Friday, marking the S&P 500’s fourth consecutive day of losses. The increased bond yields and China’s economic struggles resulted in another losing week for major benchmarks. The Dow dropped 2.2%, the S&P 500 slid 2.1%, and the Nasdaq fell 2.6% over the week, according to Dow Jones Market Data.

Market Drivers

The primary market driver has been the depreciation of longer-duration government bonds. The 10-year Treasury yield climbed for the fifth consecutive week, finishing Friday at 4.251% according to Dow Jones Market Data. Scott Wren, senior global market strategist at Wells Fargo Investment Institute, believes the recent surge in yields is "roiling the market," and the week’s stock decline is mainly due to higher yields and potential for the Fed to tighten its monetary policy to curb inflation.

David Donabedian, chief investment officer of CIBC Private Wealth US, stated, "Investors are concerned that if bond yields continue going higher, the economy is too strong and the Fed will need to raise interest rates further." This situation poses a threat for equity investors who perceive the bond market as less risky than the stock market.

Tech Companies and Chinese Market Influence

Much of the recent stock market unwind has been associated with tech-related companies that had previously benefited from the excitement around artificial intelligence. Dave Grecsek, managing director in investment strategy and research at Aspiriant, views this reset as "healthy," as it has deflated some of the froth from the US stock market.

However, the market is also concerned about China, especially after builder Evergrande filed for bankruptcy protection in the US, and the People’s Bank of China intervened to support its troubled currency. Michael Hewson, chief market analyst at CMC Markets UK, also pointed to the uncertainty around Evergrande’s sector peer Country Garden and the shadow banking system, after Chinese asset manager Zhonghzi missed a coupon payment.

Companies in Spotlight

Despite beating analyst estimates for third-quarter profit and 2023 guidance, Deere & Co. stock dropped 5.3%. Applied Materials Inc. shares rose 3.7% following a positive earnings report and outlook that surpassed Wall Street expectations. Shares of Estée Lauder Inc. fell 3.3%, despite posting better-than-expected earnings for its fiscal fourth quarter. US-listed China ADRs, including JD.com Inc., Bilibili Inc., NIO Inc., and Alibaba Group Holding Ltd., were under pressure due to China’s economic struggles.

Takeaways

In summary, the recent slide in the US stock market can be attributed to rising bond yields, China’s economic struggles, and the influence of tech companies. While some view the market reset as healthy, there remains concern about the potential impact of further increases in bond yields and economic developments in China. Investing in the current climate requires a careful evaluation of these factors and their implications for both the bond and equity markets.