By Joyce Yu
U.S. stocks fell sharply Thursday as investors remain wary about soaring bond yields despite strong earnings and economic data. Some analysts note large S&P 500 exchange traded funds have seen outflows in recent days, and panic selling among retail investors would also increase if declines persist.
Equity markets have been moving in wide ranges with no clear directions. “Corrections like this can be shortlived but painful since both the start and the end are difficult to call in the absence of clear triggers,” said Pierre Blanchet, head of multi-asset strategy at HSBC, told the CNBC. Other more optimistic traders, on the other than hand, said the correction is merely technical. Jack Ablin, chief investment officer noted, “Market valuations are expensive and need to correct. At the same time, credit conditions remain robust as the availability of money to borrow, spend and invest is strong. ”
Data reinforced growth of U.S. economy is taking foot hold. Weekly jobless claims hit a 45-year low, totaling 221,000. They fell from 230,000 in the previous week. The on-going corporate earnings season has been strong as well with 78% of S&P 500 companies that had reported as of Wednesday morning reporting better-than-expected earnings, according to Thomson Reuters I/B/E/S.
The economy has been all gas no brakes. This prompts worries that if the Fed really pumps the brakes pretty hard by raising rates more or faster, cost of borrowing would go up which would cause the economy to stall.
The benchmark 10-year U.S. note yield traded at 2.87 percent Thursday. Mark Newton, managing member at Newton Advisors, thinks “Getting over 3.05% would indeed break the 30-year downtrend and be very important to suggesting yields should begin a long-term trend higher.” The Bank of England has already suggested it may need to raise interest rates faster than previously indicated while lifting its forecasts for economic growth.
Politics and central banking news are expected to be on investors’ minds as the earnings season is coming to an end. While warning investors of “continued pressure”, Celia Dallas, chief investment strategist at Cambridge Associates, told the Financial Times that “As companies exit earnings-driven blackout periods and are again eligible to repurchase stock, this may provide a countervailing force.”