October 19, 2021

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Interest Rate Moves, Debt Worries Roil Stocks

Concept art of rising interest rates

Concept art of rising interest rates Getty Images

The stock market swooned on Tuesday amid another surge in Treasury yields and signs of trouble in Washington.

On the latter front, Senate Republicans on Monday evening blocked a bill that would raise the debt limit and avoid a government shutdown; Treasury Secretary Janet Yellen warned that the U.S. Treasury would run out of money by Oct. 18.

Today, meanwhile, yields on the 10-year Treasury note continued to sprint higher, reaching an intraday peak of 1.567% – a level it last hit in June – after eclipsing 1.5% yesterday.

That sent stock investors to the exits: The Dow Jones Industrial Average declined 1.6% to 34,299, the S&P 500 fell 2.0% to 4,352, and the Nasdaq Composite dipped 2.8% to 14,546.

“Anytime we see the 10-year UST yield move such a dramatic amount in a short period of time, especially off of low starting levels, it generally coincides with a market selloff of some magnitude,” says Brian Price, head of investment management for Commonwealth Financial Network.

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Rate-sensitive mega-cap tech and communication stocks were hit worst, with Microsoft (MSFT, -3.6%), Facebook (FB, -3.7%) and Google parent Alphabet (GOOGL, -3.7%) among the day’s notable losers; energy (+0.3%) was the only sector that finished in the green.

“It is not surprising to see value and cyclical stocks hold up better than their growth counterparts given the increase in yields,” Price adds.

Other news in the stock market today:

  • The small-cap Russell 2000 was knocked 2.3% lower to 2,229.

  • Huntsman (HUN) bucked the bearish trend on Wall Street after hedge fund Starboard Value unveiled a roughly $500 million, or 8.4%, stake in the chemical firm, according to the Wall Street Journal. The activist investor is looking to push for changes at HUN in order to boost the share price, said people familiar with the matter, though no specifics were given. The stock closed up 6.3% today to bring its year-to-date gain to more than 18%.

  • Ford Motor (F) was another one of just a handful of stocks to finish in positive territory, gaining 1.1%. This came after the automaker on Monday unveiled an $11.4 billion plan to build new facilities in Tennessee and Kentucky to produce electric vehicles (EV) and the batteries to power them. The initiative will be a joint venture between Ford and South Korean battery cell provider SK Innovation. CFRA analyst Garrett Nelson reiterated his Buy rating on F stock after the announcement, saying it “helps reassure investors at a time when many are on edge about the duration and impact of semiconductor shortages, which has inordinately impacted Ford relative to other automakers.” Additionally, he sees Ford’s EV strategy as the “most prudent and balanced” among major original equipment manufacturers.

  • U.S. crude oil futures shed 0.2% to settle at $72.59 per barrel, snapping a five-day winning streak.

  • Gold futures gave back 0.8% to finish at $1,737.50 an ounce.

  • The CBOE Volatility Index (VIX) rocked 23.9% higher to 23.25.

  • Bitcoin prices weren’t immune from Tuesday’s jitters. The cryptocurrency declined 3.3% to $41,607.45. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.)

stock chart for 092821

stock chart for 092821

YCharts

About That Debt Ceiling

America’s debt ceiling situation bears close monitoring until it’s resolved. Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, details the risks:

“The political argument this week is over the debt ceiling – a law that limits how much money the Treasury Department can raise to pay for expenses that Congress has already approved. Failure to raise the debt ceiling – which will take an act of Congress – could result in the U.S. defaulting on its debt, which could create massive disruptions to financial markets worldwide.”

Many strategists see Congress escaping this fate in the 11th hour as it has several times in the past – Zaccarelli, for instance, thinks Congress “most likely” will raise the debt ceiling before the end of the week.

Still, volatility and downside could very well persist as long as debt-ceiling uncertainty is in play.

As always: Don’t panic, just be prepared.

In this case, assess some of the safety valves you have at your disposal. First to mind are traditional defensive sectors such as consumer staples and utilities. And, of course, you’ve got bonds. Even “safe” fixed-income could take a hit in the event of a default, but ultimately, shorter-term bonds provide a lot of protection against a plethora of risks. Here, we look at seven such bond funds that can provide some ballast:

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