The S&P 500 and Nasdaq logged their first decline in 2018 as traders kept an eye on U.S. bonds following an accelerated rise in the yield on the 10-year Treasury note, prompted by a report that China is considering halting purchases of U.S. debt.
A media report that Canada is expecting President Donald Trump to shortly announce an end to the North American Free Trade Agreement also weighed on sentiment.
How did stock indexes perform?
The S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.16% lost 3.06 points, or 0.1%, to 2,748.23, after scoring its highest number of records in a new year since 1964. The Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.13% slid 10.01 points, or 0.1%, to 7,153.57 and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.84% shed 16.67 points to 25,369.13.
On Tuesday, the trio finished at fresh all-time highs.
What drove the markets?
After the record run, Wednesday’s pullback was seen as merely a pause in the rally as traders took the chance to take some profits.
Investors were, however, closely watching U.S. bonds as the yield on the 10-year benchmark note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -4.32% rose 4 basis points to an intraday high of around 2.59% after a Bloomberg News report that China is considering halting or cutting its purchases of U.S. government paper.
Rising yields can be a double-edged sword for stocks. When the gain comes from a low base, it can signal that investors are becoming more confident about the economic outlook and therefore dumping safe-haven bonds. That fans a risk-on mood — an appetite for riskier investments — in broader markets.
However, if yields rise too fast or too high, that move tends to weigh on the stock market, because it becomes more attractive to invest in the bond market rather than in stocks.
Meanwhile, a report from Reuters that Canada is increasingly convinced that Trump will withdraw from Nafta as early as this month dampened efforts by the market to rebound, with the Dow reversing its short sojourn into positive territory.
What were strategists saying?
The market’s weakness shouldn’t be viewed as the beginning of the much-feared correction in the market and is more indicative of investors turning cautious following the rise in Treasury yields, according to Bob Pavlik, chief investment strategist at SlateStone Wealth LLC.
“We’ve had quite a run, so almost anything can be a reason for a pause, but I do think backup in bond yields is impacting sentiment a bit,” said David Donabedian, who oversees about $40 billion as chief investment officer of CIBC Atlantic Trust Private Wealth Management.