Bernanke-inspired bond yield a drag on stocks
NEW YORK — It's been a chilly August for the stock market.
At the start of the month, the Dow Jones industrial average and Standard & Poor's 500 index hit all-time highs. Now the market is down 4 percent from its peak, and August is on track to be the Dow's worst month since May 2012.
On Tuesday, the Dow posted its fifth consecutive day of losses, the first time that's happened this year. While the S&P 500 and Nasdaq composite index rose modestly, it was the first time in four days those indices have been in the green.
The S&P 500 index rose 6.29 points, or 0.4 percent, to close at 1,652.35. The Nasdaq composite rose 24.50 points, or 0.7 percent, to 3,613.59. The Dow fell 7.75 points, or 0.05 percent, to 15,002.99.
The stock market slide in the past couple of weeks reflects a shift in investor strategy that began in the bond market and spilled into stocks. The spillover then mixed with lingering concerns about the economy, leading to the past several weeks of volatility, market observers say.
“The bond market is the catalyst for this selloff,” said Quincy Krosby, market strategist with Prudential Financial.
While most of the selloff occurred in the past couple of weeks, it had its origins months ago.
Until early June, bond funds had been one of Wall Street's more popular investments — particularly among average investors. More than $1.2 trillion was socked away into bond mutual funds and bond exchange-traded funds between 2009 and 2012, according to TrimTabs.
“People were just throwing money at bonds, even at low rates,” says Julius Ridgway, an investment adviser with Mississippi-based firm Medley & Brown.
That was before Federal Reserve Chairman Ben Bernanke said the central bank could pull back on its $85 billion-a-month bond-purchase program, which was designed to keep bond yields low.
Bernanke made bond investors nervous in mid-June by saying that the Fed, one of the bond market's biggest customers in the past several years, may scale back its buying. Investors pulled more than $65.8 billion out of bond funds in June, according to mutual fund research firm Lipper, the largest amount ever on a cash basis and the second largest outflow in percentage terms since the financial crisis in 2008. Investors pulled an additional $22.5 billion out of bond funds in July, according to Lipper.
With so many investors exiting bonds — particularly Treasuries — at the same time, bond prices declined sharply. The yield on the benchmark 10-year U.S. Treasury note has climbed from 1.63 percent in early May to as high as 2.88 percent this week. Yields climb as prices fall.
“As the 10-year yield has inched higher, the selling has led to more selling,” Krosby said.
As Treasury yields rise, it makes dividend-paying stocks less attractive to investors. That's because Treasuries can provide a similar return with significantly less risk.
Dividend-paying stocks have been hurt the past month. The S&P Utilities index is down nearly 5 percent while the S&P Telecommunications index is down 4 percent.
Another type of investment that got hit in recent weeks was real estate investment trusts — investment companies that focus on buying and managing real estate, commonly known as REITs.
Investors also have broader economic concerns. It is unclear how the possible ending of the Fed's bond-buying program will affect growth.
“Bernanke is going to try to make this transition as smooth as possible, but we just don't know how much (the bond buying) is going to be scaled back,” Krosby says. “And the biggest enemy to the market is uncertainty.”