Dow snaps 3-day winning streak with 300 point fall, as Treasury yields refresh 16-year highs

By Frances Yue and Isabel Wang

U.S. stock indexes closed sharply lower Wednesday as Treasury debt yields refreshed 16-year highs, while investors digested more corporate earnings results and geopolitical angst also hit market sentiment amid the escalation of violence in the Middle East.

How stocks traded

The Dow Jones Industrial Average DJIA fell 332.57 points or 1% to close at 33,665.08, ending three days of gains. The S&P 500 SPX dipped 58.60 points or 1.3% to end at 4314.60 and has now fallen for two consecutive days. The Nasdaq Composite COMP also fell for a second day, ending down 219.44 points or 1.6% to finish at 13314.30

On Tuesday, the Dow industrials and the S&P 500 ended nearly flat, while the Nasdaq Composite dropped 0.3%, according to FactSet data.

What drove markets

U.S. government debt markets again weakened on Wednesday, weighing on stocks as investors parsed the third-quarter earnings results and struggled to shrug off concerns that the conflict between Israel and Hamas may lead to a broader war in the Middle East.

Long-term Treasury yields again closed at 16- and 17-year highs, with the yield on 30-year Treasury bond BX:TMUBMUSD30Y up 4.2 basis points to 4.993%, while the yield on the 10-year Treasury note BX:TMUBMUSD10Y also rose 5.6 basis points, to 4.902%, according to FactSet data.

See: Long-term U.S. Treasury yields may resume their march higher despite recent bond-market swings, BlackRock says

Despite a brief "flight to safety" Treasury trade last week amid increased uncertainty about the conflict in the Middle East, which propelled demand for safer assets and caused longer-term bond yields to fall, the economy's resilience is still going to be the dominant factor for rates until investors see evidence that monetary-policy tightening is causing the economy to slow down, said Matt Bush, managing director of macroeconomic and investment research at Guggenheim Investments.

"We've had some pretty big tailwinds that are offsetting the monetary-policy tightening that have helped the economy this year," such as the expansion in the fiscal deficit, the cool-down in inflation and cash stockpiles for consumers and businesses, Bush told MarketWatch in a phone interview on Wednesday.

"But all those factors are running toward the end of their shelf life here....So going forward, we think in the next several months it becomes more clear the economy is slowing down and monetary policy is having an effect," Bush said. "As the market increasingly comes to realize that we will see expectations for more rate cuts start to be priced in the market, and we will see longer-term rates come down."

The third-quarter U.S. corporate earnings-reporting season continued to absorb investors, with Procter & Gamble Co. (PG), Morgan Stanley (MS) and U.S. Bancorp (USB) among those presenting their numbers before the opening bell on Wall Street, while Netflix Inc. (NFLX), Tesla Inc. (TSLA) and Lam Research Corp. (LRCX) will feature after the close.

"We're only 10% through the earnings season, and so far, so good. But stocks have yet to react to the strong initial results," said Louis Navellier, chairman and founder of Navellier & Associates.

"Part of the problem is that the Megatechs not only dominate the weight of the indexes, they also deliver the lion's share of earnings, and at the same time have outsized P/E multiples which are most challenged by rising interest rates," Navellier said.

Investor sentiment also soured after reports Tuesday saying hundreds died in an explosion at a Gaza hospital, raising fears that the Israel-Hamas war would draw in other forces in the region.

Hopes that a trip by U.S. President President Biden to the Middle East might boost diplomacy have been dampened after Jordan canceled a summit at which Biden was to meet the Jordanian and Egyptian leaders as well as Mahmoud Abbas, president of the Palestinian Authority.

See: Gold's surge beats stocks over the past year as Israel-Hamas war drives bids

In U.S. economic data Wednesday, construction of new U.S. homes rebounded 7% in September to an annual pace of 1.36 million units after a sharp 1.5% drop in the prior month, although building permits, a sign of future construction, fell 4.4% to a 1.47 million rate.

The Federal Reserve needs to "wait, watch and see" how the economy evolves before making any interest-rate moves, said Fed Governor Christopher Waller in a Wednesday speech.

The Fed's Beige Books said Wednesday that the U.S. economic growth is "stable" to "slightly weaker," while the labor market tightness continued to ease across the nation.

Companies in focus

Morgan Stanley shares closed 7.6% lower on Wednesday after the bank said its third-quarter profit fell 10% amid weakness in its investment-banking business, but its trading and asset management revenue rose.Procter & Gamble shares rose 2.5% after the consumer-goods giant posted better-than-expected fiscal first-quarter earnings early Wednesday, boosted by another increase in prices.United Airlines UAL shares fell 9.7% on Wednesday morning after the carrier warned that the Israel-Hamas war and higher jet-fuel costs could have an impact on fourth-quarter results.Spirit AeroSystems Holdings' stock SPR surged 23.2% after the aircraft-components maker said it reached an agreement with Boeing Co. to support production stability.Interactive Brokers Group shares IBKR declined 4.1% after the electronic brokerage posted third-quarter adjusted earnings and revenue that beat estimates and said customer accounts rose 21% to 2.43 million.

-- Jamie Chisholm contributed.

-Frances Yue -Isabel Wang

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10-18-23 1629ET

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