U.S. Stocks Tumble as Bond Yields Hit Multi-Year Highs
U.S. stocks declined sharply on Thursday as U.S. Treasury yields rose to their highest level in more than seven years on robust economic data and positive comments from the Fed, sparking fears of mounting inflation. The Dow dropped for the first time in six sessions and was on pace for one of its biggest one-day drops in recent months.
The Nasdaq also fell nearly 2%, as many key names declined. Despite the pullback, U.S. stocks are still trading near record levels, raising concerns about inflated valuations with the earnings season right around the corner. Thursday’s rout was a stern reminder as to just how vulnerable the nine-year bull market is to interest-rate shocks. Much investor attention will be focused Friday on the U.S. Labor Department’s jobs report as strong data could send stocks and bond prices reeling again.
The CBOE Global Markets volatility index, known as Wall Street’s “fear gauge,” jumped 30% to its highest level since July, suggesting that investors might be bracing for more volatility. By late Thursday afternoon, the U.S. 10-year Treasury had settled just below 3.19%. The surge in Treasury yields has also prompted a rise in government bond yields across the globe.
In what now seems like a distant memory, Canada and the U.S. finally came to terms late Sunday night on a revised trade deal. The 24-year-old NAFTA agreement will be replaced by the USMCA – the U.S.-Mexico-Canada agreement. News of the trade deal sent the loonie surging above the 78-cent mark on Monday but declined later in the week, falling sharply in late Thursday trading, settling just above the 77-cent mark.
TSX Declines, Dow Up Despite Thursday Losses
For the four days covered in this report, the Dow climbed 169 points to close at 26,627, the S&P 500 shed 12 points to settle at 2,902, while the tech-heavy Nasdaq lost 166 points to close at 7,880. In Canada, the TSX declined 66 points to end at 16,007.
We continue to recommend overweight exposure to equities and underweight exposure to fixed income, relative to our long-term strategic asset allocation model. The United States-Mexico-Canada Agreement (USMCA), announced Sunday, helped reduce some of the near-term pressures facing the trade-dependent Canadian economy. Leaders from Canada, Mexico and the U.S. are expected to sign the new agreement before the end of November, at which point the agreement will be sent to the U.S. Congress for approval. The new agreement firmed investor expectations that the Bank of Canada (BoC) would raise interest rates as many as four times by the end of 2019, consistent with the strength of recent economic data releases. We share the same upbeat view of the Canadian economy but reiterate our bias toward the U.S. market in light of its more stable and diversified corporate earnings profile. Given the maturity of the current business cycle and the prospect of higher near or medium-term financial market volatility, we continue to recommend that investors manage risk through diversification across asset classes and geographic regions.
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