The good news on the U.S. economy has turned bad for Wall Street, with the stock market slumping after better-than-expected reports on job market and business activity.
Stock Market Falls Amid Rising Bond Yields
The S&P 500 fell by 1.1% after giving up an early gain, while the Dow Jones Industrial Average dropped by 178 points, or 0.4%. The Nasdaq composite tumbled by 1.9%.
The stock market’s decline can be attributed to rising yields in the bond market, which jumped immediately after the release of the encouraging reports on the economy. These reports indicated that U.S. employers were advertising more job openings at the end of November than economists expected, and activity for finance, retail, and other services businesses grew much faster in December than anticipated.
Strong Economy Could Keep Up Pressure on Inflation
While the strong reports are good news for workers looking for jobs and those worried about a possible recession, they could also keep up pressure on inflation. This could make the Federal Reserve less likely to deliver cuts to interest rates that Wall Street loves.
The Fed began cutting its main interest rate in September to give the economy a boost, but it has hinted at a slowdown in easing coming. The threat of tariffs from President-elect Donald Trump has raised worries about possible upward pressure on inflation, which has stubbornly remained just above the Fed’s 2% target.
Tuesday’s Report on U.S. Services Industries
The report on U.S. services industries from the Institute for Supply Management also contained discouraging trends on inflation, saying price increases accelerated in December. Expectations for fewer cuts to interest rates had already been building for weeks, which sent longer-term Treasury yields upward.
Higher Yields Put Pressure on Stocks
So have worries about other possible Trump policies, such as tax cuts, which could swell the U.S. government’s debt and likewise push yields higher. Those higher yields make Treasury bonds more attractive to investors who might otherwise buy stocks, which in turn puts downward pressure on stock prices.
The super-safe bonds are paying notably more, with the yield on a 10-year Treasury climbing to 4.69% from 4.63% shortly before the release of Tuesday’s reports and from just 4.15% in early December. High yields can put heavy pressure on stocks seen as the most expensive, which pulls the lens toward Nvidia and other Big Tech stocks that have soared in the frenzy around artificial-intelligence technology.
Nvidia’s Losses
Nvidia had been on track to set another all-time high in morning trading after CEO Jensen Huang unveiled a suite of new products and partnerships the night before. However, after Tuesday morning’s economic reports, which hit the market after its first half hour of trading, Nvidia swung to a loss of 6.2% and became the heaviest weight on the S&P 500.
Losses for Amazon, Tesla, Apple, and Microsoft were the next-strongest forces dragging the index lower.
Market Shifts into ‘Good News is Bad News’ Environment
Now that worries from the summer about a potentially slowing U.S. economy have abated and the 10-year Treasury yield is firmly above 4.50%, "we believe the market is shifting into a ‘good news is bad news’ environment again," according to Bank of America strategists led by Ohsung Kwon.
This raises the stakes for Friday’s coming update on the U.S. job market, which economists expect will show a slowdown in overall hiring. They’re looking for growth of 156,500 jobs, down from 311,000 in December.
Stock Market Reactions
The S&P 500 fell by 66.35 points to 5,909.03, while the Dow Jones Industrial Average slipped by 178.20 to 42,528.36. The Nasdaq composite sank by 375.30 to 19,489.68.
In stock markets abroad, some notable Chinese companies fell after the U.S. Defense Department added dozens of them to a list of companies it says have ties to China’s military. The announcement caused some of the companies to protest and say they will seek to have the decision reversed.
Tencent’s stock that trades in Hong Kong fell by 7.3%, while the Hang Seng index dropped by 1.2%. However, indexes were stronger elsewhere in China and across much of Asia and Europe.
Conclusion
The good news on the U.S. economy has turned bad for Wall Street, with the stock market slumping after better-than-expected reports on job market and business activity. The strong economy could keep up pressure on inflation, making the Federal Reserve less likely to deliver cuts to interest rates that Wall Street loves.
The rising bond yields and worries about Trump policies have also put downward pressure on stocks. As the market shifts into a "good news is bad news" environment, investors will need to be cautious in their investments.