U.S. stocks moved lower Tuesday as Wall Street opened September under pressure from rising oil prices, higher government bond yields and concerns that inflation could remain difficult to control. Investors are watching energy markets, interest rates and the conflict in the Middle East as they consider what the Federal Reserve may do next.
Major Stock Indexes Start September in the Red
The major U.S. stock indexes were all lower during Tuesday trading. Around midday, the S&P 500 was down about 0.4%, while the Dow Jones Industrial Average had lost roughly 200 points. The technology heavy Nasdaq Composite was down more than 0.5%.
The losses came after a mostly positive August in which all three major indexes recorded monthly gains. September, however, has historically been a difficult month for stocks.
Reuters reported that since 1926, the S&P 500 has declined by an average of 0.7% during September, according to data cited by Fisher Investments.
Technology stocks were among the biggest pressures on the market. Microsoft and Advanced Micro Devices declined, while Reuters also reported weakness in Nvidia and Intel. Higher borrowing costs can be especially important for growth focused technology companies because financing new investments becomes more expensive as interest rates rise.
Bond Sell Off Sends Borrowing Costs Higher
A continuing sell off in government bonds has become another major concern for investors.
The yield on the 10 year U.S. Treasury moved close to 4.8%, reaching its highest level in nearly 20 months. Bond yields rise when bond prices fall, meaning investors are demanding greater returns to hold government debt.
Higher Treasury yields can spread throughout the economy because they influence borrowing costs for mortgages, corporate loans and other forms of credit.
They can also make stocks less attractive. When investors can earn higher returns from relatively safer government bonds, some may become less willing to pay high prices for riskier investments such as equities.
Concerns about government debt are adding to the pressure. U.S. federal debt recently passed $40 trillion, while investors are also watching growing borrowing needs in other major economies.
The bond pressure is not limited to the United States. Japanese 10 year government bond yields moved above 3% for the first time since 1996, while German government borrowing costs also reached levels not seen in years.
Rising Oil Prices Bring Inflation Back Into Focus
Oil has become one of the biggest forces affecting financial markets.
Brent crude climbed above $90 per barrel as renewed fighting involving the United States and Iran increased concerns about energy supplies. The Strait of Hormuz remains especially important because about one fifth of the world’s oil normally travels through the waterway.
Higher oil prices can quickly spread through the economy. Businesses face higher transportation and production costs, while consumers can pay more for gasoline and products that need to be shipped long distances.
That creates another problem for the Federal Reserve. Inflation remains well above the central bank’s 2% target, increasing expectations that officials may need to keep monetary policy tight or raise interest rates further.
Ryan Isherwood, founder and CEO of Significance Capital, said investors may need to become more cautious.
“It’s time to trim the winners and position a little bit more defensively,” Isherwood said.
Energy Stocks Find Support While Tech Struggles
Not every part of the market was falling.
Energy stocks gained as oil prices rose, making the sector one of the stronger areas of the S&P 500. At the same time, consumer discretionary and technology shares were among the weakest sectors.
This difference shows how higher energy prices can create winners and losers at the same time. Oil producers may benefit from higher crude prices, while businesses that depend heavily on transportation, borrowing or consumer spending may face greater pressure.
Investors are therefore paying close attention not only to the direction of the overall market but also to how different industries respond to higher rates and energy costs.
Investors Turn Their Attention to the Federal Reserve
Economic reports could play an important role in determining what happens next.
U.S. job openings rose to 7.27 million in July, slightly below economists’ expectations, while investors are waiting for the more important monthly employment report due Friday. Inflation data expected later could have an even greater effect on expectations for Federal Reserve policy.
If inflation stays high because of energy prices and other costs, the Fed could face pressure to keep interest rates elevated. That could continue pushing borrowing costs higher and create more challenges for stocks.
However, a slowdown in inflation or the economy could change those expectations and provide some relief to bond and equity markets.
Markets Face a Difficult Start to September
Wall Street is beginning September with several major risks competing for investors’ attention. Rising oil prices are adding to inflation concerns, government bond yields are pushing borrowing costs higher, and geopolitical tensions are creating uncertainty around global energy supplies.
Stocks are still coming off gains in August, but the combination of expensive energy, higher interest rates and a broad global bond sell off could make September more volatile. Investors will now be watching inflation, employment data and the Federal Reserve for signs of whether those pressures are likely to ease or continue.
